The Trader Tax Status (TTS) is for taxpayers who make a living selling and buying securities. The scheme has numerous benefits for day traders, such as remitting business expenses, losses, and deductions from employee retirement accounts.
The IRS instructs you to count every opening and closing of a business separately instead of round trips. In essence, if you enter and exit a trade, count it separately. The recommended average weekly trader for a successful trader to qualify is four days, four days each week, 16 weekly trades, 60 monthly trades, and 720 yearly trades.
For example, you can reach the securities markets in 250 days, excluding some holidays, making it 240 days of trade each year. The hard work will result in 75% trade of the 240 days resulting in 180 days per year. Finally, 720 yearly transactions are divided by 180 trading days, amounting to four daily businesses.
Taxpayers involved in the scheme must be full employees. It can be a way to earn extra bucks. You can qualify for active trading while on a full-time job due to technology advancement and flexible job routines. However, trying to qualify through existing business activities is impossible. On the other hand, you can form a new trade entity. Trading with existing business capital seems like a sideline job.
Many taxpayers file their returns on Schedule C, which is allowed but not the proper way of filing taxes as a part-time trader. The strategy used in filing taxes demonstrates a taxpayer’s job and activities, including retirement, which can reduce your possibility of qualifying. The strategy may place trading as a side hustle that leads to denial by the IRS.
As a TTS trader, it is important to have the equipment, business services, education, and a home office. In addition, you can have multiple monitors, cloud services, mobile devices, subscriptions, education expenses, wireless, trading services, and so on. Some TTS traders also have staff.
However, a taxpayer looking to qualify for TTS has to do fundamental business operations that Uncle Sam will recognize. In essence, if you use your home office for the sole purpose of business instead of personal use, it will appear on the tax return because it is not a valid deduction but shows the IRS that the business is legitimately going on in the space.
To qualify for TTS as a securities trader, you must have up to $25,000 with a U.S based broker to be seen as a Pattern Day Trader (PDT). On the other hand, securities traders that need PDT will find it challenging to qualify for TTS, including equities and equity options. However, with the PDT statute, you can trade with a 4:1 margin instead of 2:1. In addition, the size of the account depends on the total worth and cash flow from trading securities. In essence, traders with millions could need larger account sizes, but a petite trader with inadequate cash flow may use smaller accounts.
The IRS does not consider these four types of trades under TTS qualification.
Outside-developed Automated Trading Systems. This type is a computerized trading service (ATS) involving fewer hands of the trader. The IRS rebuked this operation under TTS. If a trader writes the code or algorithms, sets the entry and exit points, executes the program, or shows adequate involvement in the procedure,
Trade copying service. These are Trade Copying Software (TCS) similar to ATS or outside advisers, which may not qualify the copycat trader.
Engaging a money manager. The IRS does not qualify trades that use a registered investment adviser (RIA) or commodity trading adviser (CTA).
Trading retirement funds. Using a tax-deferred retirement account to trade does not count.
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Dennis Jao