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  Copyright© 1999, 2000, 2001, 2002, 2003, 2004 & 2007 Colin M. Cody, CPA and TraderStatus.com, LLC, All Rights Reserved.
 
A few years ago there were approximately five million people who were registered to trade stocks on-line
1. In April 2000 about 50,000 were day traders3 These numbers are projected to increase four-fold to more than twenty million households2  and many of them need to make the choice to file there taxes as an investor or to file using trader status. 

There is no reason why you, as a qualifying active trader, cannot file as a trader status taxpayer on your own using readily available tax preparation software. All it takes is your time and a good, thorough understanding of the methods used to file properly as a trader status taxpayer.

How thorough? Find out now, by taking this quiz, if you need an accountant and this summary on  hiring a tax pro to prepare your taxes or not!  While trader status concepts are more complex than anything in the quiz...  If you do score well, you probably have what it takes to do just fine if preparing your own trader status tax return!  Otherwise, please consider using TraderStatus.com

Become your own expert on Trader Status tax filings - order the
TradersTaxPlan documentation, instructions and forms...

Click here for Schedule D / Form 4797 software.
 

But use CAUTION:  Tax Court: "TurboTax" Defense, Still a No-Go

Washington (Nov. 15, 2006) - The U.S. Tax Court has again rejected a taxpayer’s attempt to pin the blame for their negligent tax return on tax preparation software

On Nov. 9, the court handed down an opinion finding against a petition filed in New Jersey by Henry R. Broderick.

According to court records, the petitioner blamed defects in his income tax return on software that he claimed to use in preparing the Form 1040 return. Broderick, who owns a consulting firm, understated his taxable income by more than $50,000, leaving him with no tax on his 2002 return. However, the court said the blame rested with taxpayer negligence -- which includes failure by the taxpayer to keep adequate books and records or substantiate line items properly.

According to the court, "Such a program is only an aid for preparation of a return and depends on careful entry of accurate information, which petitioner manifestly failed to do. Petitioner admits that he has the education to prepare and review his income tax return. ... Accordingly, petitioner’s use of software in preparing his return does not constitute reasonable cause for the errors in his return."

The court rejected a similar "TurboTax defense" in February. The full opinion for the Broderick case is available at www.ustaxcourt.gov/InOpHistoric/Broderick.SUM.WPD.pdf





The TraderStatusTax Notebook site offers a convenient way to organize your tax information (other than individual trades) which can then be forwarded to us to complete and sign your tax return as the CPA preparer.

At anytime during the process of entering your data in our online service you should become a full-service client and we can take over your tax file from where you left off, completing the tax work and signing the original tax returns as your CPA preparer.

DO YOUR OWN TAXES

As a securities daytrader you put your expenses on "Schedule C" and a listing of your trades on Schedule D (if a valid Mark-to-Market election was made by April 16, 2002 then use form 4797 instead of Schedule D).  Answers to many general questions may be obtained via the site's FAQ listing.  Answers to general common daytrader questions may be obtained via email once you start your "Schedule C." More detailed information is available by purchasing our 2002/2003 TradersTaxPlan documentation, instructions and forms... ($200)


Or you can find blank forms at these web sites:

Downloadable  IRS Tax Forms

Downloadable  IRS Tax Forms, year-by-year

Downloadable  IRS Tax Forms

Downloadable  State Tax Forms

Downloadable  State Tax Forms (Yahoo)

Downloadable  State Tax Forms (Federation of Tax Administrators)

Downloadable  IRS & State Tax Forms (TurboTax)

Downloadable  IRS & State Tax Forms (Zillion Forms)


Downloadable  Canadian Customs and Revenue Agency (CCRA) Tax Forms


Canada information

Links to Legal Resources and Forms


Viewable Legal Bitstream - Tax Case Law Lookup


Viewable MegaLaw's Tax Law Page





Links to Employer Payroll Tax Registration  Employer Payroll Taxes


Downloadable  State Employment Taxes


Google search for CA  State Employment Taxes (simply change the State)


Google search for CA  State Business Taxes (simply change the State)

Viewable IRS tax rates and tax brackets

Viewable IRS FAQ and other information


Viewable
Deloitte Tax Guide for 2004/2005 PDF file

Viewable IRS Addresses for tax returns

Viewable IRS Addresses for tax return (search)

Uncle Fed web site Uncle Fed's Tax board

NAICS codes (f/k/a SIC Codes) to use on tax returns NAICS Code Online Search

NAICS codes (f/k/a SIC Codes) to use on tax returns NAICS Code Online Search

U.S. Census Bureau (NAICS codes) to use on tax returns NAICS Code Online Search

U.S. City information city-data.com

The North American Industry Classification System ( NAICS ) has replaced the U.S. Standard Industrial Classification ( SIC ) System Search.



 



Federal Taxpayer Identification Number (TIN)
also known as a Federal Employer Identification Number (EIN) needed for many trader entities may be obtained online at http://www.irs.gov/businesses/small/article/0,,id=102767,00.html
The "provisional EIN" number obtained via this internet link is also called an I-EIN or a "two-oh number" since all I-EINs are issued in the format 20-#######, through 2006.   Starting in 2007: 26-#######.    27-####### has been used as well.


IRS information on TIN / EIN's:
IRS form SS-4
IRS Instructions for form SS-4
IRS EIN FAQ
IRS publication 1635 "understanding your EIN"



While do-it-yourselfers are allowed to get their own TIN using IRS form SS-4 for their trading entity, we request that our clients and soon-to-be clients let us do the application for your TIN to avoid any problems or the raising of "red flags" on your account.  You may legally authorize us to do this by signing a print-out of these linked pages:
http://www.irs.gov/pub/irs-pdf/i2848.pdf
http://www.irs.gov/pub/irs-pdf/f2848.pdf
http://www.irs.gov/pub/irs-pdf/iss4.pdf
http://www.irs.gov/pub/irs-pdf/fss4.pdf
 and sending to us.





Extensions for filing form 1040 can be obtained by calling (888) 796-1074 between April 1, 2005 and April 15, 2005.  Have a rough draft of a filled in extension form 4868 and your 2004 form 1040 when you call this telephone number.  2004 is planned to be the last year that the IRS will offer this option.  Do not use this method if you are planning on electing M2M for 2005, which requires attaching the election statement to form 4868 and mailing both to the IRS via certified mail.  You may not elect M2M using the telephone method.

Where to file your IRS extension request, form 1040 & estimated taxes: http://www.irs.gov/file/content/0,,id=105693,00.html


Beginning in 2006 (for 2005 tax returns) for individuals (form 1040) and for businesses (forms 1065, 1120, 1120S), an automatic six month extension (form 4868 or form 7004) will be automatically granted by the IRS.

Where to file your business IRS tax returns: http://www.irs.gov/file/index.html





Where's my refund?
You filed your tax return and you're expecting a refund?  You have just one question and you want the answer now - Where the heck is my refund?
IRS link:
http://www.irs.gov/individuals/article/0,,id=96596,00.html
alternative IRS & State link:
refunds


IRS refund schedule for e-filed tax returns:
http://www.irs.gov/pub/irs-pdf/p2043.pdf


Tax rates / tax tables:
http://www.smbiz.com/sbrl001.html





Note, effective with the 2005 form 1040, the IRS said that they no longer accept program print-outs on blank paper, rather they must be properly formatted and printed on IRS Schedule D-1. (This requirement was retracted in January 2006).   See below for some of the automated "Trade Matching" or "Schedule D" programs available from other web sites  (some of these may also offer free demo or lower priced versions for a restricted number of transactions):

Note, effective with 2008, brokers are required to submit form 1099-B no later than later than February 15th of the following calendar year. (the prior law was January 31st)
(Pub. L. 110-343, Div. B, §403(a)(3), amended subsec. (b) of IRC §6045)

Note, effective with 2011, securities brokers are required to do the trade-matching and provide the gain/loss report to the customer no later than February 15th of the following calendar year.  (Pub. L. 110-343, Div. B, §403(a)(2), added subsec. (g) to IRC §6045).   To better comply with this new requirement, IRC §6045 §6045A & §6045B cover special new rules for the reporting of options*, wash sales, "versus purchase" or VSP sales, transfers of securities into broker accounts, and corporate actions such as stock splits and spin offs.  Wolters Kluwer Financial Services Cost Basis Reporting Resource Center

New form 1099-B reports to the IRS your wash sales and your FIFO taxable gain/loss for each sale made.  Proposed instructions to securities brokers were issued on 12/17/2009 see Reg-101896-09

* As of November 2008  IR Regs §1.6045-1(a)(3)(vi) remains unchanged: "[The term "security" means:] An interest in a security described in paragraph (a)(3) (i) or (iv) (but not including options or executory contracts that require delivery of such type of security)."   and Regs §1.6045-1(a)(9) remains unchanged "[The term "sale" does not include grants or purchases of options, exercises of call options, or entering into contracts that require delivery of personal property or an interest therein."   Meaning - that taxpayers may need to continue to do their own trade matching when it comes to their options trading.
 


Many on-line investors and on-line traders filing as trader status are doing their own tax returns right now. Taxpayers who qualify as a trader for tax purposes, using annually updated software, can save hundreds and even thousands in professional tax preparation fees each year.

When a taxpayer is audited by the IRS, CPAs generally bill additional on an hourly basis. Having done your own return and representing yourself in front of an IRS auditor can sometimes be imposing, but if you are well prepared it can save you these professional fees as well. Optionally taxpayer who prepare their own tax returns can retain a CPA firm to represent them if the IRS auditor comes to them with questions.  For most taxpayers this is the best way to go... before replying to an IRS letter or make any contact with the IRS.  Fill in (
form 2848 form 2848 ) as best you can and get it to your tax advisor/representative rather than communicating with the IRS directly.

Audit Protection Insurance will cover some or all of the costs of CPA representation for your 2002 form 1040 using myself, or most any CPA of your choosing.  This new coverage may even insure you against the taxes assessed and the interest charged as a result of the audit, and that's even if the errors were admittedly due to your own mistakes!




We hope that you find using the information found on this site and our
newsletter to be an invaluable starting point. Of course this information is only for discussion purposes and some of the positions discussed are sophisticated and/or aggressive. Other positions are basic and conservative. As such, taxpayers may utilize the information contained therein only at their own risk. Even though thousands of traders file on their own, we must make this statement: "All taxpayers are advised that they should not rely on the information found on this site and our email and newsletters, but should retain the guidance of appropriate competent counsel familiar with their own unique situations."

Beware of the
"wash sale" rule and generally of all the questionable tax advice found on the internet - such as the examples in our:  Tax- advice Hall of Shame

Make sure to sign up for our
free email newsletter to keep yourself informed of trader status issues.

 

Other links that may be obsolete:

More personalized, full-service trade tracking is available:

  • Traders Administrative Services, LLC offers time- and money-saving trade tracking,
    capital gains calculations, and administrative services to busy trading professionals.
    http://tradersadministrativeservices.com

 

 


1 Testimony of Arthur Levitt , Chairman of the U.S. Securities and Exchange Commission Before the Senate Permanent Subcommittee on Investigations Committee on Governmental Affairs, Concerning Day Trading September 16, 1999 "Technological advances have also fostered the development of a new kind of broker-dealer. These firms promote day trading, which discards many established investing principles, such as choosing securities to buy and sell based upon company fundamentals and performance. This new trading phenomenon, while well-publicized, is relatively limited in its reach, with the number of day traders estimated to be less than 7,000. By comparison, there are close to 80 million individuals that own stock and more than 5 million investors using the Internet for brokerage services."

2 A study by Jupiter Communications sees the online brokerage sector increasing assets seven fold from $415 billion at the end of 1998 to more than $3 trillion by the end of 2003.  Online trading households are expected to grow from 4.3 million in 1998 to more than 20.3 million in 2003.  They expect 41% of US households holding stocks to have online trading accounts in 2003.  Gomez Advisors and Harris Interactive project that 2.85 million investors with offline brokerage accounts are "likely" or "extremely likely" to open an online brokerage account in the next six months.

3 Bear, Stearns & Co, analyst Amy S. Butte quoting from a newly completed report entitled "Day Trading and Beyond: A New Niche is Emerging."  This report says that each day 75% of the online trading volume is done by day traders or so-called "semiprofessionals."

   

 


Various Payroll and Tax Links for the US States

Form W-2 corrections


2004 state unemployment wage bases announced:

    • Alabama . . . . . . . . . . . . $8,000
    • Alaska . . . . . . . . . . . . . $27,100*
    • Arizona . . . . . . . . . . . . . $7,000
    • Arkansas . . . . . . . . . . . $10,000*
    • California . . . . . . . . . . . . $7,000
    • Colorado . . . . . . . . . . . . $10,000
    • Connecticut . . . . . . . . . $15,000
    • Florida . . . . . . . . . . . . . . $7,000
    • Illinois . . . . . . . . . . . . . .$10,000*
    • Iowa . . . . . . . . . . . . . . . $19,700*
    • Massachusetts . . . . . . $14,000*
    • Michigan. . . . . . . . . . . . . $9,000
    • Minnesota . . . . . . . . . . .$22,000
    • Mississippi . . . . . .. . . . . $7,000
    • Missouri . . . . . . . . . . . . .$8,000*
    • Montana. . . . . . . . . . . . $20,300*
    • Nebraska . . . . . . . . . . . . .$7,000
    • New Hampshire . . . . . . . $8,000
    • New Jersey . . . . . . . . . . $24,300*
    • New Mexico . . . . . . . . . $16,800*
    • North Carolina . . . . . . . .$16,600*
    • North Dakota . . . . . . . . .$18,500*
    • Ohio . . . . . . . . . . . . . . . . . $9,000
    • Oklahoma . . . . . . . . . . . .$14,300*
    • Oregon . . . . . . . . . . . . . .$27,000*
    • Pennsylvania . . . . . . . . . .$8,000
    • Rhode Island . . . . . . . . . $14,000*
    • South Carolina . . . . . . . . $7,000
    • South Dakota . . . . . . . . . $7,000
    • Tennessee . . . . . . . . . . . .$7,000
    • Texas . . . . . . . . . . . . . . . . .$9,000
    • Washington . . . . .. . . . . $30,200*
    • West Virginia . . . . . . . . . $8,000
    • Wisconsin . . . . . . . . . . . $10,500
    • Wyoming . . . . . . . . . . . .$15,900*

* Taxable wage base increase


Click here for Salary.com's
details of each State's UC taxation policies


 

 


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