7. Deduct interest and operating expenses as ordinary expenses.However, once you claim the trader status, these benefits may not turn out to be as wonderful as they seem. <br />Electing mark to market accounting has to be done prior to the year you wish to utilize such method. This adds uncertainty because you do not know whether you will benefit from such accounting method at the time you elect it. Further, the election is irrevocable. Once you make the election – you are stuck. <br />You will need a written permission from the IRS in order to elect out of mark to market. This is very inconvenient and ironic especially considering that trading is the kind of activity where lots of flexibility and anticipation are needed.<br />Mark to market accounting gives you the benefit of avoiding the wash sale rule. The wash sale rule is avoided because mark to market requires you to report gains and losses on all securities held at the end of the year, even if you have not sold them. This is actually a major downfall for this accounting method because you could end up paying excessive taxes before you realize any gains on securities. For example, if a security peaks its price at the end of the year, you will have to pay taxes at that peak as if you have realized a gain even though you have not. When you finally sell such security and the price has fallen off, you essentially have paid a higher tax than you would have had to. Do you remember Qualcomm’s end of year run-ups in the late 90’s and early 2000’s. Can you imagine having to pay 20%+ in gains on stock you never sold that is now worth less than the taxes you owe? Why would you willingly put yourself in that situation?<br />The unlimited ordinary loss deduction available to traders is plainly a counter-intuitive idea for claiming trader status. The whole purpose of claiming such status is because you seek to trade securities and conduct such activity as a business, in order to make a profit. It makes no sense for you to claim the status in order to write off the losses. If you know you are going to lose money trading, you might as well not trade in the first place.<br />Further, this benefit can actually never be realized for a single taxpayer who claims trader status. The reason is because the IRS and the courts would not allow someone who has other employment to qualify as a trader. In other words, you would not have any other ordinary income other than the income from trading. However, to claim the loss deduction you would have lost money from trading. Because you have no ordinary income from trading and you are not permitted to have other ordinary income from activities outside of trading, you would not be able to write off the trading losses against anything.<br />Your alternative<br />Considering all three aspects, for a trader, there is a much better solution than claiming trader status with the IRS and trade in your own name. Since you are serious about trading, the best solution is to operate like a business. Operating a business with proper business structures ensures that you are treated as a business by the IRS and receive the maximum tax benefits that a legitimate business should receive. <br />At BOSS, we have done diligent research and carefully devised a structure that best serves this purpose for people trading in the stock market. The purpose of the structure is to maximize asset protection, estate planning and tax benefits in a comprehensive structure. <br />This structure consists of setting up a limited liability entity (such as a limited partnership or LLC) as your trading vehicle. The limited liability entity holds your trading brokerage account. We generally recommend a limited partnership for traders, but it really depends on your individual circumstances. <br />A corporation is then established as a small percentage owner and manager of the limited partnership (or LLC). If you utilize this trading structure, you can be sure that your trading business receives the maximum benefits from all three aspects previous mentioned: asset protection, estate planning, and tax. In addition, you are freed from the worries of qualifying as a trader in the IRS’s eyes.<br />Asset protection<br />One of the benefits of having a proper business structure is that it provides protection for your assets. Rather than owning everything under your name, your trading-related assets are shielded behind the limited partnership or LLC. Should any unfortunate event arise and you are personally sued, you are ensured that your trading activity, which may be your primary source of income, is not jeopardized. <br />Depending on where you file, both limited partnerships and LLCs provide charging order protection. This means that for a creditor to get to the assets inside the entity, said creditor would need to obtain a judgment, get a charging order and then petition the court and seek why that creditor should be allowed to do what no other creditors are allowed to do; namely, pierce the entity and attach the assets. Because the limited partnership or LLC was set up with a legitimate business purposes, this will be next to impossible for the creditor to do. For example, in Nevada, the creditor would have to show fraud or illegal activity to even be considered. <br />Estate Planning<br />Having a proper business structure also is an effective estate planning tool. Owning all of your assets without organization is like holding a mound of sand in your palms. The grains will slip through your fingers if you are not careful, the wind can scatter them, and it is difficult to pass on. Worse yet, it is easy for others to take a scoop from you. This is not an ideal way to handle your assets. <br />Now imagine you take the sand in your palms and pour it into a container and add a lid on top. Now the sand will not scatter in the wind or fall through your fingers. It is much easier to pass on to someone else. It is also much more difficult for others to come and take a scoop because the lid protects the sand. <br />Having a proper business structure is similar to placing the sand in the container. Your assets and businesses are organized and the ownership is consolidated and protected. It is much safer and much more effective tool for your estate planning and can be easily passed on or handed off. <br />Tax<br />The purpose of having the dual entity structure is that each entity serves its purposes and they work harmoniously together as a team. As previously mentioned, the limited partnership or LLC will serve as your trading vehicle and as an effective asset protection tool. The corporation is established to manage your limited partnership or LLC (and others), to engage in any other active business activities, and at the same time, it allows you to utilize the flexible tax deductibility and fringe benefits a corporation enjoys.<br />Under this structure, the limited partnership or LLC will be your primary medium to generate income since it is your trading vehicle. The gains realized from trading can be distributed to the individual partners. That would be you and whoever else you are in business with. The corporation serves as the manager of the limited partnership or LLC and earns a management fee and possibly guaranteed payments (if you so choose). <br />The income from the limited partnership or LLC is taxed only at the individual level, so there is no worry about double taxation treatment for the corporation dividends. There is also no self-employment tax for this income. In addition, since you are no longer concerned with qualifying for the trader status, you may have other sources of income to supplement your livelihood. If you have trading losses from the limited partnership, these losses are passed on to the individual level and can be offset against your other passive income or carried forward.<br />The corporation provides you with the flexibility of various deductions and fringe benefits otherwise not available for an individual taxpayer. One of the biggest is the medical reimbursement, dental and vision plan. These are 100% deductible fringe benefits and it will substantially lower your costs for any medical expenses. In addition, expenses related to your business, such as office equipment, vehicle, software, advice, educational publications, and seminars, etc. are all deductible as business operating expenses for the corporation. These expenses can be carried over the years and offset against the income the corporation receives; namely, the management fees and guaranteed payments. <br />If you find that trading is not for you and you have losses in the corporation when you shut down, so long as a good organization (like BOSS) prepared the documents properly, you will be able to write off the losses against your ordinary income at that time. In other words, you will still ultimately receive the tax benefits of the structure even if it fails. <br />Recommendation<br />While using a structure is not the equivalent of claiming trader status, it is a much more comprehensive and safer structure for an individual who trades. Even though the wash sale rule stays effective with this structure, it can be easily navigated by a careful trader. This structure ensures that you would not have to deal with the burden and uncertainty of complying with the requirements of the trader status. It also avoids the rigidity and risk that accompanies mark to market accounting. <br />The trading structure also provides you with the benefits in asset protection and estate planning, which is otherwise unavailable to individuals merely attempting to claim trader status. <br />In addition, it provides many tax benefits that are not available to individual taxpayers.<br />All in all, this is a much better system for traders in security to run as a business. If you are serious about trading, it is highly recommended that you establish the business structure rather than claiming trader.<br />Would you like to speak to someone about your trading structure? <br />Give BOSS Business Services a call at 888-969-BOSS (2677) and ask for a complimentary review. You may also visit us on the web and request a free consultation with one of our attorneys, tax professionals or planners. <br /> Visit www.BossOffice.com for more information.<br />