Professional Trader Status

[vikings123]

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

Interesting for sure because based on the discussion I had with him, Corey thought this was still the best option. I have asked for a follow up and will discuss a very specific example this time. Pretty sure I even gave him some estimated realized gains and went through a scenario.

 

[ZenMan]

I do think Anderson's C Corp could be useful if your monthly trading income is $20k - $50k. If it is $200k+ then the C Corp becomes onerous and only saves pennies on the dollar.

So if anyone has a discussion with Anderson make sure they are explicitly aware of the amount of annual trading income you will be generating. I know Tesla and am comfortable trading around my core shares so am not interested the Opportunity Zones route. Corey did also bring up Conservation Easements as a way to save 4-5X on the amount spent on the easement, but I feel like that is borderline fraud.

I'm resigned to paying the US Treasury what is due and either setting up a Trust or Physically relocating my official residence to the State of Wyoming to bring my State Income Tax outlay to zero.

 

[bballshinobi]

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.

No, I didn't have to. My broker (Merrill Edge) simply allowed me to transfer the shares from my personal accounts to the corporate account.

Did you use a specific CPA to discuss things and assist you in setting up your C-corp? My wife and I are already in the 37% bracket and the money we make selling options getting taxed at 37% + 3.8% seems like it makes sense to do the C-corp based on what you describe. We don’t need the money now from selling options, so getting this to grow faster by lowering taxes on this now would definitely help. If you wouldn’t mind sharing your CPA’s info, that would be great.

Setting up a CPA is easy - after all it's just paperwork and filing those paperwork. You will want to talk to a good CPA who actually deals with clients who own businesses as compared to somebody who simply help you file taxes.


Response to both @Bornto and @Chicagoguy :

Since you guys are both looking into I will share things my CPA talk to me about that you will have to think about as well. I think some of the other comments touched upon them as well, so hopefully my perspective and strategy will help:

(1) How will you put money in the corporation

If you simply transfer your shares to a corporate account, that money is treated as your seed investment in the corporation. However, assuming one day you will stop trading and/or sell your shares, you will have a taxable event when you close/liquidate your corporation. You will get taxed twice I believe: first when you sell your shares in the corp account (21% on capital gains) then 15-20% again when you close the corporation and move money to your personal name if it's more than the original sum that you put in.

What I decided to do: I structured the transfer as a loan i.e. I am loaning my TSLA shares to my corporation, and the corporation pays me an interest every month. This way if/when I ever need a large sum of money from the corporation, the corporation can give me a principal payment.

(2) How will you get money out of the corporation

Assuming you're already in the highest tax bracket with your other income, then a C Corp will make sense. However, if you're not, then a S Corp might work better. I can't recall the details because my CPA advised me to go with C Corp, but because S Corp still flows through your personal tax rate so if you don't have other income then S Corp is better (something like that... lol).

You will have to consider how you want to get the money out:

• Salary - your marginal tax rate + 15.3% FICA
• Dividend - 36% (21% corporate + 15% personal)
• Interest - your marginal personal tax rate

You will also avoid the 3.8% Net Investment Tax by keeping your personal income (married couple) under $250,000. I think under $199,000 income you can still make ROTH IRA contribution.

(3) Consider what business expenses you can write off and tax strategies you can use

A Corp allows you to use some of these tax saving strategies I found:

• Healthcare cost - if you buy individual health insurance i.e. no group plan from your day job nor medicare, then you can use the C Corp to set up an ICHRA, which will allow you to deduct all your healthcare costs such as insurance premium, co-pay, and deductible payments. It can even be used to cover out of pocket medical expenses your insurance won't cover. For example, my wife and I are doing IVF, and we use the ICHRA to write it off.
• SEP IRA - it allows you to put in 20% of your salary from the C Corp, up to $61k.
• Travel + Food - maybe you are doing some market research when you go to Florida? Maybe you are flying a relative in because he wants to make investment in your C Corp? Maybe you are having dinner with a potential investor?

 

[BornToFly]

I guess we are back to square one....
Nothing like having politicians take half of your money, while they tell everyone that you aren't paying your fair share. I would feel better about giving millions to support the government, and all the people that depend on our money, if we were actually thanked and appreciated instead of hated.

 

[bballshinobi]

If I meet trader status requirements and jump through all the hoops... Will I also realize the same tax benefits from, say, LEAPS and any HODLING shares I sell, even if the LEAP income and income from shares I've held makes up the vast majority of my taxable income in my professional trading account?

You automatically become "professional" trader by setting up either a LLC or S/C corp.

 

[vikings123]

What I decided to do: I structured the transfer as a loan i.e. I am loaning my TSLA shares to my corporation, and the corporation pays me an interest every month. This way if/when I ever need a large sum of money from the corporation, the corporation can give me a principal payment

Great inputs, thank you. I have a situation where I need a down payment on a house I plan to purchase next year.

Is it better to(not advice I know):

1. Convert existing individual brokerage account to a corporation brokerage account and not treat it as a loan? If I’m withdrawing from my initial investment will that be considered a taxable event? Is it better to withdraw that money now before I convert to a corporation brokerage account?

2. Consider the initial investment as a loan like you mentioned?

 

[bballshinobi]

Great inputs, thank you. I have a situation where I need a down payment on a house I plan to purchase next year.

Is it better to(not advice I know):

1. Convert existing individual brokerage account to a corporation brokerage account and not treat it as a loan? If I’m withdrawing from my initial investment will that be considered a taxable event? Is it better to withdraw that money now before I convert to a corporation brokerage account?

2. Consider the initial investment as a loan like you mentioned?

Not knowing your portfolio size, financial situation, etc., I will make a recommendation based on what I would do: take out a loan against your shares

You won’t have to pay capital gains and if you are set up as a Corp you can write off the interest. It won’t affect your mortgage application worthiness (I am a loan officer so this part I can tell you for sure) since the loan is under the corporation and also against financial securities. You can slowly pay down the loan by selling and trading options against those shares.

However, if you absolutely have to sell shares in order to come up with the down payment. Doing it in your personal account is probably better as the long term capital gains rate is 15%/20% depending on your income level whereas the corporate is 21%.

 

[BornToFly]

You won’t have to pay capital gains and if you are set up as a Corp you can write off the interest. It won’t affect your mortgage application worthiness (I am a loan officer so this part I can tell you for sure) since the loan is under the corporation and also against financial securities. You can slowly pay down the loan by selling and trading options against those shares.

So is the corporation buying the house in your scenario?

 

[vikings123]

Not knowing your portfolio size, financial situation, etc., I will make a recommendation based on what I would do: take out a loan against your shares

You won’t have to pay capital gains and if you are set up as a Corp you can write off the interest. It won’t affect your mortgage application worthiness (I am a loan officer so this part I can tell you for sure) since the loan is under the corporation and also against financial securities. You can slowly pay down the loan by selling and trading options against those shares.

However, if you absolutely have to sell shares in order to come up with the down payment. Doing it in your personal account is probably better as the long term capital gains rate is 15%/20% depending on your income level whereas the corporate is 21%.

Thanks, a couple of quick follow ups regarding "take out a loan against your shares"

Let's take this example

Personal Account Value: 1M$
Loan this 1M$ to corporation for 5 years @ 6%
Corporation makes monthly payments for 60 months @ 19,332.80 per month
Total Interest paid: $159,968.09

I think you are saying that the corporation can write off this interest?

How about the tax liability on the personal side since I'm earning interest?

You could get really creative with this setup if you include the margin loan from your brokerage. I could potentially charge a higher interest rate for the loan too. Do I have this right?

Edit: It sounds like the loan has to be at LIBOR rates so the interest payment will be insignificant. This option seems like a good way to get money to your personal account in a controlled fashion while also allowing for a huge payment.

 

[BornToFly]

I don't talk to Anderson until next week, but I'm still trying to figure out if a C-corp would still be helpful for me. I currently own a share of my jet which is part of a fleet shared with others. In a couple years, I might leave this program and buy my own $6M jet. If the C-corp buys the jet and deducts the expense, that is saving $3M in taxes that year. Operating cost on the jet is $250-300k/year. I'm assuming that would be tax deductible by the C-corp. I'm assuming depreciation what be tax deductible as well. But on the expense side, I don't know what taxes, if any, a company has to pay the government for its employees (toward social security, medicare, etc.), that would be in addition to the 21% corporate tax amount (assuming the current administration doesn't increase corporate taxes as well).

 

[vikings123]

I don't talk to Anderson until next week, but I'm still trying to figure out if a C-corp would still be helpful for me. I currently own a share of my jet which is part of a fleet shared with others. In a couple years, I might leave this program and buy my own $6M jet. If the C-corp buys the jet and deducts the expense, that is saving $3M in taxes that year. Operating cost on the jet is $250-300k/year. I'm assuming that would be tax deductible by the C-corp. I'm assuming depreciation what be tax deductible as well. But on the expense side, I don't know what taxes, if any, a company has to pay the government for its employees (toward social security, medicare, etc.), that would be in addition to the 21% corporate tax amount (assuming the current administration doesn't increase corporate taxes as well).

All you have to do is prove to the IRS that you do all your trading from your JET

 

[AquaY]

I do think Anderson's C Corp could be useful if your monthly trading income is $20k - $50k. If it is $200k+ then the C Corp becomes onerous and only saves pennies on the dollar.

So if anyone has a discussion with Anderson make sure they are explicitly aware of the amount of annual trading income you will be generating. I know Tesla and am comfortable trading around my core shares so am not interested the Opportunity Zones route. Corey did also bring up Conservation Easements as a way to save 4-5X on the amount spent on the easement, but I feel like that is borderline fraud.

I'm resigned to paying the US Treasury what is due and either setting up a Trust or Physically relocating my official residence to the State of Wyoming to bring my State Income Tax outlay to zero.

I live in New york. they will not let you go. If you own a house in the state you are a state resident for tax purposes. I legitimately wanted to find out what I had to do to Escape from NY Taxes. If I lived greater than 6 months in another state i thought that would do it. No. According to my accountant.
In order to have NY consider you a non resident you have to leave and land. Sell your property in NY AND have another residence in another state before they will let you go.
5 more years and i will move for good.
Until then i would love a legitimate way to avoid paying some taxes to the feds and the state if possible.

 

[BornToFly]

The Accountant sent me this link:

Accumulated Earnings Tax: Definition and Exemptions

The accumulated earnings tax is imposed on certain corporations with retained earnings deemed to be excessive for their "reasonable" business needs.

www.investopedia.com

I might be able to have $6M in earnings, instead of 250k, if I can say that the company needed to accumulate that money to buy the jet....

 

[generalenthu]

On the topic of state taxes, here is an informative article on how to get around the 10K limit on state taxes deductible limit (I think) by forming a trading entity.

I should really be setting some time up with Anderson, but need to clear a few things before that. Meanwhile if any of you happen to meet them in the next few days, feel free to bring this up.

High-Income Business Owners Escape $10,000 Tax Deduction Cap Using Path Built by States, Trump Administration

Congressional Democrats are debating whether increasing the $10,000 cap on the state and local tax deduction would benefit the rich too much. More than 20 states have created workarounds to the limit, and New York’s law firms and private-equity firms are signing up.

www.wsj.com

 

[vikings123]

I don't talk to Anderson until next week, but I'm still trying to figure out if a C-corp would still be helpful for me. I currently own a share of my jet which is part of a fleet shared with others. In a couple years, I might leave this program and buy my own $6M jet. If the C-corp buys the jet and deducts the expense, that is saving $3M in taxes that year. Operating cost on the jet is $250-300k/year. I'm assuming that would be tax deductible by the C-corp. I'm assuming depreciation what be tax deductible as well. But on the expense side, I don't know what taxes, if any, a company has to pay the government for its employees (toward social security, medicare, etc.), that would be in addition to the 21% corporate tax amount (assuming the current administration doesn't increase corporate taxes as well).

Anderson recommended that you do not purchase vehicle under the C-Corp. Instead use the mileage expenses for reimbursement.

 

[BornToFly]

Anderson recommended that you do not purchase vehicle under the C-Corp. Instead use the mileage expenses for reimbursement.

I'm hoping an airplane is different....

 

[Chicagoguy]

On the topic of state taxes, here is an informative article on how to get around the 10K limit on state taxes deductible limit (I think) by forming a trading entity.

I should really be setting some time up with Anderson, but need to clear a few things before that. Meanwhile if any of you happen to meet them in the next few days, feel free to bring this up.

High-Income Business Owners Escape $10,000 Tax Deduction Cap Using Path Built by States, Trump Administration

Congressional Democrats are debating whether increasing the $10,000 cap on the state and local tax deduction would benefit the rich too much. More than 20 states have created workarounds to the limit, and New York’s law firms and private-equity firms are signing up.

www.wsj.com

Yeah, if you're in one of the states that passed this and have a business, this will work. The states don't lose tax dollars, just the federal govt does. This will be used for 2021 using my dental office

 

[bballshinobi]

So is the corporation buying the house in your scenario?

No, I was just talking about if you are planning to buy a house and will apply for a mortgage. Setting up a C Corp and making a loan to your C Corp won’t affect your mortgage eligibility in terms of income and/or debt to income ratio.

 

[bballshinobi]

Thanks, a couple of quick follow ups regarding "take out a loan against your shares"

Let's take this example

Personal Account Value: 1M$
Loan this 1M$ to corporation for 5 years @ 6%
Corporation makes monthly payments for 60 months @ 19,332.80 per month
Total Interest paid: $159,968.09

I think you are saying that the corporation can write off this interest?

How about the tax liability on the personal side since I'm earning interest?

You could get really creative with this setup if you include the margin loan from your brokerage. I could potentially charge a higher interest rate for the loan too. Do I have this right?

Edit: It sounds like the loan has to be at LIBOR rates so the interest payment will be insignificant. This option seems like a good way to get money to your personal account in a controlled fashion while also allowing for a huge payment.

You are correct. The interest is written off as expense on the corporation side but it’s taxed as income on the personal side. Assuming you don’t have other income and are married, paying tax on the personal side is better up to about $204,000 ($178,150 marginal rate is 22% + $25,900 standard deduction vs. corp rate of 21%).

You will have to give yourself a small salary, and then the rest will be dividends.

IRS publishes a table of rates each month. Find it here.The rate you are charging yourself needs to be higher than what’s on the table. Type up a loan agreement between yourself and the corp, and just make sure the corp pays you interest each month/quarter.

Edit:

Based on my math, if you do it this way you keep your marginal tax rate at about 36% (21% corp + 15% dividend rate (20% over $501k). It still sucks but it’s better than paying 50%+ if you have another primary income.

I am actually looking into opening a corporation in Singapore as their corp rate is only 17% there. Maybe charge my C Corp for “trading consultation “ and move some money there as a insurance plan before we become a communist country lol

 

[adiggs]

On the topic of state taxes, here is an informative article on how to get around the 10K limit on state taxes deductible limit (I think) by forming a trading entity.

I should really be setting some time up with Anderson, but need to clear a few things before that. Meanwhile if any of you happen to meet them in the next few days, feel free to bring this up.

High-Income Business Owners Escape $10,000 Tax Deduction Cap Using Path Built by States, Trump Administration

Congressional Democrats are debating whether increasing the $10,000 cap on the state and local tax deduction would benefit the rich too much. More than 20 states have created workarounds to the limit, and New York’s law firms and private-equity firms are signing up.

www.wsj.com

Yeah, if you're in one of the states that passed this and have a business, this will work. The states don't lose tax dollars, just the federal govt does. This will be used for 2021 using my dental office

That's awesome info. I'm in Oregon with a 9% state income tax with very little deduction (about the first $50k or so). Being able to deduce that in full will move the needle. Any idea what to search on, or where to find out which states have this implemented?