Professional Trader Status

[KTC Lurker]

Glad this has come back to the top of mind for the group. I'm happy to provide referrals. If you'd like me to send one, please shoot me a DM with your first name and email address and I'll take care of the rest.

 

[vikings123]

Can you share the referral with me, please? Thank you!

Would also be interested in a referral please

Thanks

Can you share your referral?

@KTC Lurker Would you like to refer them? I think that makes the most sense given you took the time to research this firm and had multiple follow up discussions. I'm fine either way. Thanks again.

Edit: just saw your latest post. @Ad Astra, @strago13 and @Chicagoguy Please send a PM to @KTC Lurker with your details. Cheers.

 

[BornToFly]

This will depend on your personal and tax situation. There are a few things you need to consider:

• Your marginal tax rate
• Corp rate = 21%
• Employee FICA + Medicaer tax rate = 7.65%
• Self employment tax = 15.3%
• C Corp maximum retained earnings = $250,000

If you are self employed, your marginal rate = your tax bracket + 15.3%.
If you are an employee (W2), your marginal rate = your tax bracket + 7.65%.

If you already have high income generated by your job/business, then a C Corp setup can make sense. My wife's and my self-employment incomes alone put us in the 24% bracket. However, if I keep trading (I buy/sell options) under my name, our total income is pushed into the 32/35% bracket. This means for every dollar I make through my self-employment business, I am paying 47.3% (32% + 15.3% SE tax) in taxes. Every short-term profit will also get taxed at 32%.

So basically, here what I have done:

• Create a C Corp
• Get a Business Investor account from my broker (Merrill Edge)
• Transfer assets from my personal accounts to the C Crop account
• C Corp can pay me by:
  • Salary (taxed at my personal rate)
  • Benefits / reimbursements (medical, business expenses, etc. - not taxed)
  • Dividend (taxed at 15% on the personal level, but 21% on the C Corp level, so 36% total)
  • Interest payment (taxed at my personal rate)

My income from my business will just have a marginal tax rate of 39.3% now (24 + 15.3) while all my trading will be at 21%.

If your job/self-employment income isn't above the 22% bracket and/or your trading profit doesn't push you up the tax bracket, setting up a C Corp probably doesn't make sense. However, if both incomes are significant, a C Corp can be a good strategy. Talk to a professional CPA/tax planner about your situation though.

I have a question about transferring assets to the C corp. Do you have to sell all your stock, pay taxes, and then transfer? I have TSLA shares that are up >1000%. I don't want to have to sell them to transfer them to the C corp.

 

[KTC Lurker]

@KTC Lurker Would you like to refer them? I think that makes the most sense given you took the time to research this firm and had multiple follow up discussions. I'm fine either way. Thanks again.

Edit: just saw your latest post. @Ad Astra, @strago13 and @Chicagoguy Please send a PM to @KTC Lurker with your details. Cheers.

I have a question about transferring assets to the C corp. Do you have to sell all your stock, pay taxes, and then transfer? I have TSLA shares that are up >1000%. I don't want to have to sell them to transfer them to the C corp.

Transferring the assets (manual transfer as IBKR refers to it), does take some time. Getting the organizational account set up (business brokerage) is tedious and then requires approval. Then, transferring the assets takes about 3 weeks. Also, it's good to note that they can't transfer options contracts. This is the biggest delay, for me.

Also, this is in the weeds, but helpful to know; you'll set up the org brokerage under your partnership (jointly owned by you personally and the c-corp). It does not require you to sell anything, other than the above options hurdle, so there's no issues with incurring cap gains.

 

[BornToFly]

Transferring the assets (manual transfer as IBKR refers to it), does take some time. Getting the organizational account set up (business brokerage) is tedious and then requires approval. Then, transferring the assets takes about 3 weeks. Also, it's good to note that they can't transfer options contracts. This is the biggest delay, for me.

Also, this is in the weeds, but helpful to know; you'll set up the org brokerage under your partnership (jointly owned by you personally and the c-corp). It does not require you to sell anything, other than the above options hurdle, so there's no issues with incurring cap gains.

I talked to someone at Fidelity today about opening up a business account and transferring my assets from my joint account. Unfortunately, the person I talked to wasn't very knowledgeable. It sounds like I will have to reapply for option trading privileges after the account is open, which means there may be some trading downtime. I hate the thought of giving up $500k to $1M in earnings to do the transfer, but the tax savings will more than make up for it later. I hope that at Fidelity I can transfer my options contracts, because I have share backed covered calls for Jan 2024 that are deeply negative right now, and I don't want to buy them back at a huge loss to do the transfer (but I guess I could sell them again as soon as everything is in place and get the money back).

 

[KTC Lurker]

I talked to someone at Fidelity today about opening up a business account and transferring my assets from my joint account. Unfortunately, the person I talked to wasn't very knowledgeable. It sounds like I will have to reapply for option trading privileges after the account is open, which means there may be some trading downtime. I hate the thought of giving up $500k to $1M in earnings to do the transfer, but the tax savings will more than make up for it later. I hope that at Fidelity I can transfer my options contracts, because I have share backed covered calls for Jan 2024 that are deeply negative right now, and I don't want to buy them back at a huge loss to do the transfer (but I guess I could sell them again as soon as everything is in place and get the money back).

YMMV but I was able to setup the org account with options permissions already enabled. For me it was the 3 week delay in transfer that would skew what closed positions may be worth when everything was done that has pushed me in the direction of doing 2 transfers. The first, a partial transfer of assets to start trading in the biz account and optimize taxes on some earnings. The second once my sold options are closed and my leverage required is comfortably lower than my bought LEAPs. Once I sell or convert the bought LEAPs I'll transfer those over to the org account. All in I think it will take ~6 months to transfer a mid 7 figure brokerage without sacrificing much in terms of earnings, especially when weighed against the tax savings.

 

[ZenMan]

I talked to someone at Fidelity today about opening up a business account and transferring my assets from my joint account. Unfortunately, the person I talked to wasn't very knowledgeable. It sounds like I will have to reapply for option trading privileges after the account is open, which means there may be some trading downtime. I hate the thought of giving up $500k to $1M in earnings to do the transfer, but the tax savings will more than make up for it later. I hope that at Fidelity I can transfer my options contracts, because I have share backed covered calls for Jan 2024 that are deeply negative right now, and I don't want to buy them back at a huge loss to do the transfer (but I guess I could sell them again as soon as everything is in place and get the money back).

I was looking into the C Corp avenue and it won't work if you are generating that level of income. C Corps can only retain $250k of income per year. All income above this level has to be distributed as dividends. So you get double taxation (21% C Corp tax rate plus 23.8% dividend rate including 3.8% Obamacare surcharge.) So 44.8% total rate instead of 37% + 3.8% Obamacare top personal tax rate. Plus you lose Long Term Capital Gains rate of 23.8% vs C Corp combined rate of 44.8%.

Sure you can offset some expenses from your trading income but there was no way to come up with expenses to offset even one week of my trading income. So if you are generating over $500k / year in trading income the C Corp won't help much at all and you might even pay more total taxes than as an individual.

 

[BornToFly]

YMMV but I was able to setup the org account with options permissions already enabled. For me it was the 3 week delay in transfer that would skew what closed positions may be worth when everything was done that has pushed me in the direction of doing 2 transfers. The first, a partial transfer of assets to start trading in the biz account and optimize taxes on some earnings. The second once my sold options are closed and my leverage required is comfortably lower than my bought LEAPs. Once I sell or convert the bought LEAPs I'll transfer those over to the org account. All in I think it will take ~6 months to transfer a mid 7 figure brokerage without sacrificing much in terms of earnings, especially when weighed against the tax savings.

That is another question I have. On my Fidelity application, it asks about Initial Funding (and says it is a one-time contribution). Can you legally fund your business account with multiple transfers from your private brokerage? It makes it easy if you can, because then I transfer my cash and start option trading. Then I wait to close out my options on my margin account until the point next year when the losses from buying back the CC matches the earnings for the year, at which point I transfer my shares.

 

[BornToFly]

I was looking into the C Corp avenue and it won't work if you are generating that level of income. C Corps can only retain $250k of income per year. All income above this level has to be distributed as dividends. So you get double taxation (21% C Corp tax rate plus 23.8% dividend rate including 3.8% Obamacare surcharge.) So 44.8% total rate instead of 37% + 3.8% Obamacare top personal tax rate. Plus you lose Long Term Capital Gains rate of 23.8% vs C Corp combined rate of 44.8%.

Sure you can offset some expenses from your trading income but there was no way to come up with expenses to offset even one week of my trading income. So if you are generating over $500k / year in trading income the C Corp won't help much at all and you might even pay more total taxes than as an individual.

I will definitely need to ask Anderson that question. I should make 8 figures/year selling options. If I can't leave that as cash in the account to compound, then there is no point in doing any of this.

 

[ZenMan]

I will definitely need to ask Anderson that question. I should make 8 figures/year selling options. If I can't leave that as cash in the account to compound, then there is no point in doing any of this.

I'm certain of this. You can't build a trading war chest in a C Corp.

I've spent dozens of hours researching tax minimization strategies. The best I came up with was forming a WING (Wyoming Incomplete-gift Non-Grantor Trust) trust to avoid paying State Income taxes while having Federal taxes stay the same as at a personal tax level.

However, the BBB that passed the House assesses individual tax surcharges of 5% of income in excess of $10 million, and an additional surcharge tax of 3% on income in excess of $25 million at the Personal level but assesses at much lower thresholds ($200k / $500k) for non grantor trusts.

I was hoping to start clean with a WING for 2022, but now need to wait until we know for certain if this provision will be included in the final BBB or if BBB will pass at all.

 

[MP3Mike]

I'm certain of this. You can't build a trading war chest in a C Corp.

I'm spent dozens of hours researching tax minimization strategies. The best I came up with was forming a WING (Wyoming Incomplete-gift Non-Grantor Trust) trust to avoid paying State Income taxes while having Federal taxes stay the same as at a personal tax level.

Is it only cash that you can't horde in a C Corp? Could you convert all the cash to TSLA shares and then sell options against that using margin? (Assuming that your broker will grant margin to a C Corp account.)

 

[ZenMan]

Is it only cash that you can't horde in a C Corp? Could you convert all the cash to TSLA shares and then sell options against that using margin? (Assuming that your broker will grant margin to a C Corp account.)

No, it is not just cash. It is Earnings. So if you are earning income from the options then the C Corp pays 21% on the earnings and the C Corp will be required to disburse dividends on the retained earnings above $250k that you will pay an additional 23.8% at the Personal level.

I talked extensively with Anderson and the primary reason to set up the C Corp is for Asset Protection, not Tax Minimization.

 

[bkp_duke]

No, it is not just cash. It is Earnings. So if you are earning income from the options then the C Corp pays 21% on the earnings and the C Corp will be required to disburse dividends on the retained earnings above $250k that you will pay an additional 23.8% at the Personal level.

I talked extensively with Anderson and the primary reason to set up the C Corp is for Asset Protection, not Tax Minimization.

Only half joking by asking this . . . but move to the Caymans and trade via Starlink?

I'm not kidding when I say 50% is about my pain threshold for taxes, total in aggregate. Beyond that I'm literally working more for someone else than myself.

 

[ZenMan]

Only half joking by asking this . . . but move to the Caymans and trade via Starlink?

I'm not kidding when I say 50% is about my pain threshold for taxes, total in aggregate. Beyond that I'm literally working more for someone else than myself.

You should only exceed 50% if you are including state income taxes in your calculation. Once there is more clarity on Biden's BBB you might want to set up a WING or NING trust to avoid paying State Income taxes.

The United States taxes it's citizens on their Worldwide income. Setting up a Cayman Island company and then funding with Cash and then trading with that entity is theoretically possible but you can get hit with a tax evasion suit...

 

[KTC Lurker]

I was looking into the C Corp avenue and it won't work if you are generating that level of income. C Corps can only retain $250k of income per year. All income above this level has to be distributed as dividends. So you get double taxation (21% C Corp tax rate plus 23.8% dividend rate including 3.8% Obamacare surcharge.) So 44.8% total rate instead of 37% + 3.8% Obamacare top personal tax rate. Plus you lose Long Term Capital Gains rate of 23.8% vs C Corp combined rate of 44.8%.

Sure you can offset some expenses from your trading income but there was no way to come up with expenses to offset even one week of my trading income. So if you are generating over $500k / year in trading income the C Corp won't help much at all and you might even pay more total taxes than as an individual.

Are you sure and have engaged a tax pro on this to confirm? The experts at Anderson haven't flagged this as an issue.

 

[bkp_duke]

You should only exceed 50% if you are including state income taxes in your calculation. Once there is more clarity on Biden's BBB you might want to set up a WING or NING trust to avoid paying State Income taxes.

The United States taxes it's citizens on their Worldwide income. Setting up a Cayman Island company and then funding with Cash and then trading with that entity is theoretically possible but you can get hit with a tax evasion suit...

I was including state income taxes in that. I was also talking completely giving up citizenship and moving to the Caymans.

Wife, however, might have issues with that. It's the main reason I'm still in California. As penance I do make her look at the state tax bill every year.

 

[ZenMan]

Are you sure and have engaged a tax pro on this to confirm? The experts at Anderson haven't flagged this as an issue.

I have. I have talked with several CPAs and Tax Attorneys. Plus had two conversations with Corey Posgay at Anderson Advisors who confirmed a C Corp would not work for tax minimization in my case due to the $250k retained earnings limitation.

 

[KTC Lurker]

I have. I have talked with several CPAs and Tax Attorneys. Plus had two conversations with Corey Posgay at Anderson Advisors who confirmed a C Corp would not work for tax minimization in my case due to the $250k retained earnings limitation.

Interesting, as Corey is the guy I work with as well.

 

[vikings123]

I was looking into the C Corp avenue and it won't work if you are generating that level of income. C Corps can only retain $250k of income per year. All income above this level has to be distributed as dividends. So you get double taxation (21% C Corp tax rate plus 23.8% dividend rate including 3.8% Obamacare surcharge.) So 44.8% total rate instead of 37% + 3.8% Obamacare top personal tax rate. Plus you lose Long Term Capital Gains rate of 23.8% vs C Corp combined rate of 44.8%.

Sure you can offset some expenses from your trading income but there was no way to come up with expenses to offset even one week of my trading income. So if you are generating over $500k / year in trading income the C Corp won't help much at all and you might even pay more total taxes than as an individual.

Are you sure and have engaged a tax pro on this to confirm? The experts at Anderson haven't flagged this as an issue.

I’m glad you posted this. I have a follow up to discuss a very specific scenario.

The way I understood this is that you set up an LLC and a C-Corp structure. This allows you to pay a salary and that the salary would be a deduction to the C-Corp meaning you will not be double taxed and you would pay your individual income tax rate on your salary. I think you are right about dividends though.

 

[KTC Lurker]

There are a combination of things you can do to reduce the C-corp retained earnings. There's also this approach, which I plan to use in 2022 (

https://www.reddit.com/r/fatFIRE/comments/qrb800

)

I was not discretely aware of the $250K limit, so thank you for surfacing that. I'll have to incorporate that into my planning.