A method of identifying specific shares of
securities to be sold for tax purposes--also called "vs. purchase." If
versus purchase is not specifically stated at the time of sale, the
IRS deems the securities sold are made on a first-in first-out
(FIFO) basis.
Typically, you can have your broker add a
memo line to your confirmation statement, per your instructions. For
example, if you're selling the 100 shares you bought on March 31,
2008, ask your broker to write on your confirmation that the
transaction is a sale "vs. purchase 3/31/08." For online trades, you
should immediately follow up with a phone call to specify your
instructions.
Exceptions to matching buys and sells on the FIFO basis exist for
mutual fund shares (for which taxpayers generally elect to use the
rolling average cost basis) and for publicly traded partnerships
(for which IRS Rev. Rul. 84-53 requires a rolling average cost
basis, referred to as a unified/unitary basis, in the PTP units).
An exception to the exception for PTP units is found in
IRS Regs. 1.1223-3(c)(2)(i). The partner may make an
election under Regs. 1.1223-3(c)(2)(i)(C) as follows: "The
selling partner [may elect] elects
to use the identification method for all sales or exchanges
of interests in the partnership after September 21, 2000. The
selling partner makes the election referred to in this paragraph
(c)(2)(i)(C) by using the actual holding period of the portion of
the partner's interest in the partnership first transferred after
September 21, 2000 in reporting the transaction for federal income
tax purposes."
The trade-through rule, which was first
instituted in 1975, was designed to make sure investors got the best
available price for their stock trade. A market system would not
allow one customer to "trade through" an existing order without
first matching that order. A customer's order has to be routed to
the destination with the best price at the moment the order is
entered.
That sounds like a good idea on the surface, but the rule was
enacted before electronic markets existed. Though it's moving in the
direction of automation, the NYSE is still at heart a manual system,
with trades handled by specialists in particular stocks.
Nasdaq, however, is fully automated, so while a quote on a Nasdaq
stock is currently executable, a quote on an NYSE stock is
considered an indication and not a firm quote.
The trade-through rule as it stands means that if you place an order
and the best possible quote is with a particular specialist on the
floor of the NYSE, then your broker is required to route your order
there. But a NYSE quote is not immediately executable–it's more
analogous to an advertised price than an actual price.
Specialists are allowed to hold an order for 30 seconds before
either executing it or handing it off to another specialist—and
during that time, the price may change.
Executives at the NYSE have defended the trade-through rule, saying
it's good for small investors. But Nasdaq members often charge NYSE
specialists with bait-and-switch pricing tactics so that orders are
routed to the NYSE, then executed at a worse price than what was
available at the time the order was entered.
The trade-through rule mandates that when a security is available on
more than one exchange, transactions may not occur in one market if
a better price is offered on another market. Defenders of the rule
portray it as an essential protection for investors, particularly
small investors who find it difficult to monitor their brokers’
performance. Opponents argue that its principal effect is
anti-competitive; that it protects traditional exchanges – where
brokers and dealers meet face to face on trading floors – from newer
forms of trading based on automatic matching of buy and sell orders.
The Securities and Exchange Commission (SEC) has proposed new
regulations that would modify the trade-through rule, which it
describes as antiquated, by allowing investors to “opt out” of the
rule voluntarily and by permitting traders on “fast” markets to
trade through (that is, ignore) better prices offered on
non-automated exchanges. The securities industry is divided on the
SEC’s proposal, but there is a consensus that amending the
trade-through rule could force dramatic changes in the way stocks
are traded, especially on the world’s largest market, the New York
Stock Exchange (NYSE). Committees in both the House and Senate have
held hearings on this and other market structure issues, most
recently in the House Financial Services Subcommittee on Capital
Markets, Insurance, and Government-Sponsored Enterprises on May 18,
2004.
Regulation SHO replaces Rules 3b-3 and
10a-2, as well as certain self-regulatory organization (“SRO”) rules
governing short sales, and modifies Rule 10a-1. Specifically, Rule
Regulation SHO requires short sellers in all equity securities to
locate securities to borrow before selling, and also imposes strict
delivery requirements in order to settle short sales. The regulation
further includes a temporary rule that establishes procedures by
which the SEC may temporarily suspend, on a pilot basis, the current
“tick” test and the short sale price test of any exchange or
national securities association for specified securities. Regulation
SHO also defines ownership of securities, permits the establishment
of aggregation units (thereby avoiding firm-wide determination of
net long and short positions) subject to certain requirements, and
requires broker-dealers to mark sales in all equity securities
“long,” “short,” or “short exempt.” Finally, the SEC voted to
eliminate the shelf offering exception in Rule 105 of Regulation M
under Regulation SHO, thereby prohibiting short sales covered by
securities offered off the shelf.
Powerful computers, some housed right next
to the machines that drive marketplaces like the New York Stock
Exchange, enable high-frequency traders to transmit millions of
orders at lightning speed and, their detractors contend, reap
billions at everyone else’s expense.
These systems are so fast they can outsmart
or outrun other investors, humans and computers alike. And after
growing in the shadows for years, they are generating lots of talk.
Nearly everyone on Wall Street is wondering
how hedge funds and large banks like Goldman Sachs are making so
much money so soon after the financial system nearly collapsed.
High-frequency trading is one answer.
And when a former Goldman Sachs programmer
was accused this month of stealing secret computer codes — software
that a federal prosecutor said could “manipulate markets in unfair
ways” — it only added to the mystery. Goldman acknowledges that it
profits from high-frequency trading, but disputes that it has an
unfair advantage.
Yet high-frequency specialists clearly have
an edge over typical traders, let alone ordinary investors.
Flash orders are also called "step up" or
"pre-routing display" orders. The rationale for these order types is
simple: Better me than you. They allow a venue to execute marketable
orders in-house when that market is not at the national best bid or
offer, instead of routing those orders to rival markets. They do
this by briefly displaying information about the order to the
venue's participants and soliciting NBBO-priced responses. Similar
to front-running, if there are no responses, the order can be
canceled or routed to the market with the best price.
All four markets with flash orders treat
these orders in a similar way. If they get a marketable buy order,
for instance, that would otherwise be routed to a market quoting at
the NBBO, they flash the order to some or all of their participants
as a bid at the same price as the national best offer. Exactly who
sees the flash, how that information is conveyed and the duration of
the flash vary by market. The maximum allowable time for a flash is
500 milliseconds, or half a second, although most of the markets
flash routable orders for under 30 milliseconds.
EXAMPLE: July 15, 2009 Intel had reported
robust earnings the night before. Some investors, smelling
opportunity, set out to buy shares in the semiconductor company
Broadcom. (Their activities were described by an investor at a major
Wall Street firm who spoke on the condition of anonymity to protect
his job.) The slower traders faced a quandary: If they sought to buy
a large number of shares at once, they would tip their hand and risk
driving up Broadcom’s price. So, as is often the case on Wall
Street, they divided their orders into dozens of small batches,
hoping to cover their tracks. One second after the market opened,
shares of Broadcom started changing hands at $26.20.
The slower traders began issuing buy
orders. But rather than being shown to all potential sellers at the
same time, some of those orders were most likely routed to a
collection of high-frequency traders for just 30 milliseconds — 0.03
seconds — in what are known as flash orders. While markets are
supposed to ensure transparency by showing orders to everyone
simultaneously, a loophole in regulations allows marketplaces like Nasdaq to show traders some orders ahead of everyone else in
exchange for a fee.
In less than half a second, high-frequency
traders gained a valuable insight: the hunger for Broadcom was
growing. Their computers began buying up Broadcom shares and then
reselling them to the slower investors at higher prices. The
overall price of Broadcom began to rise.
A Dark Pool Trading system is an internal
system which is intended to trade stocks privately with the
objective of liquidating large stock positions at lower costs. Many
of these systems have evolved into alternative trading systems ATS
(Alternative Trading Systems), where liquidity is reported to
reside, but cannot be seen with the naked eye. The sources of
dark liquidity include, ATS, crossing networks and other dark
pools, and unlike traditional liquidity sources such as stock
exchanges, trade on these systems and draw their prices from the
market, and in most cases do not have any market impact. Thus they
may not print their trade details back to the market essentially
because regulations do not currently require it.
In the recent past, the financial markets
have undergone lot of changes in terms of trading strategies, new
product innovations, the regulatory requirements, and a growth in
technology have led to increase in trading volumes. Along with the
volumes on the exchanges, the trading volumes of the dark pool
trading systems are growing every day. Today, there are more than 40
dark pool systems that are operational in US market.
The Dark Pool Trading systems, mainly used
by the institutional traders who trade in large volumes, help
institutional investors in getting more liquidity and less
transaction cost, strategies are not exposed to the markets- less
transparency, fund manager strategies are best implemented with the
use of algorithmic trading whereby best execution is possible. In
spite of these benefits, few issues like inadequate price
transparency, regulatory requirements and uniform information access
to all kinds of investors are still debatable.
Considering the complexity of these trading
systems in terms of technology, speed, functionalities and system
performance, it is very important that the functional testing along
with the gateways testing and performance testing need to be done.
Any account that executes 4 or more round-trip
trades within any rolling 5 business day period, provided the number
of day trades represent at least 6% of the total trading activity
during the 5 business day period. This rule became effective
September 28, 2001.
NASD Rule 2520 (and NYSE Rule 431). Day
Trading Margin Requirements:
Day Trading
(i) The term “day trading” means the
purchasing and selling or the selling and purchasing of the same
security on the same day in a margin account except for:
a. a long security position held overnight
and sold the next day prior to any new purchase of the same
security, or
b. a short security position held overnight
and purchased the next day prior to any new sale of the same
security.
(ii) The term “pattern day trader” means
any customer who executes four or more day trades within five
business days. However, if the number of day trades is 6% or less of
total trades for the five business day period, the customer will not
be considered a pattern day trader and the special requirements
under paragraph (f)(8)(B)(iv) of this Rule will not apply. In the
event that the organization at which a customer seeks to open an
account or to resume day trading knows or has a reasonable basis to
believe that the customer will engage in pattern day trading, then
the special requirements under paragraph (f)(8)(B)(iv) of this Rule
will apply.
(iii) The term “day trading buying power”
means the equity in a customer’s account at the close of business of
the previous day, less any maintenance margin requirement as
prescribed in paragraph (c) of this Rule, multiplied by four for
equity securities.
Whenever day trading occurs in a customer's
margin account the special maintenance margin required for the day
trades in equity securities shall be 25% of the cost of all the day
trades made during the day. For non-equity securities, the special
maintenance margin shall be as required pursuant to the other
provisions of this Rule. Alternatively, when two or more day trades
occur on the same day in the same customer’s account, the margin
required may be computed utilizing the highest (dollar amount) open
position during that day. To utilize the highest open position
computation method, a record showing the “time and tick” of each
trade must be maintained to document the sequence in which each day
trade was completed.
(iv) Special Requirements for Pattern Day
Traders
a. Minimum Equity Requirement for Pattern
Day Traders - The minimum equity required for the accounts of
customers deemed to be pattern day traders shall be $25,000. This
minimum equity must be deposited in the account before such customer
may continue day trading and must be maintained in the customer’s
account at all times.
b. Pattern day traders cannot trade in
excess of their day-trading buying power as defined in paragraph
(f)(8)(B)(iii) above. In the event a pattern day trader exceeds its
day-trading buying power, which creates a special maintenance margin
deficiency, the following actions will be taken by the member:
1. The account will be margined based on
the cost of all the day trades made during the day,
2. The customer’s day-trading buying power
will be limited to the equity in the customer’s account at the close
of business of the previous day, less the maintenance margin
required in paragraph (c) of this Rule, multiplied by two for equity
securities, and
3. “time and tick” (i.e., calculating
margin using each trade in the sequence that it is executed, using
the highest open position during the day) may not be used.
c. Pattern day traders who fail to meet
their special maintenance margin calls as required within five
business days from the date the margin deficiency occurs will be
permitted to execute transactions only on a cash available basis for
90 days or until the special maintenance margin call is met.
d. Pattern day traders are restricted from
using the guaranteed account provision pursuant to paragraph (f)(4)
of this Rule for meeting the requirements of paragraph (f)(8)(B).
e. Funds deposited into a pattern day
trader’s account to meet the minimum equity or maintenance margin
requirements of paragraph (f)(8)(B) of this Rule cannot be withdrawn
for a minimum of two business days following the close of business
on the day of deposit.
3.5) Those Professional Trader
rules sound complicated. Can you give me more rules to really
make my head spin?
Sure! Nasdaq vender alerts makes subtle
distinctions (primarily looking for who signs the subscription
agreement, rather who pays the bill):
Through August 31, 2001 this was their rule:
Vendors of Nasdaq® real-time market data
are required to identify the non-professional status of any
subscriber for whom they are seeking to pay the lower,
non-professional subscription rate for Nasdaq Level 1 ServiceSM.
To qualify for the lower, non-professional
rate, an individual subscriber must be able to answer "NO" to
all of
the following questions:
- Are you registered with any state,
federal, or international securities agency or self-regulatory
body?
- Are you engaged as an Investment
Advisor?
- Are you employed by an organization that
is exempt from U.S. securities laws that would otherwise require
the individuals’ registration?
- Is your account either billed or
contracted under a business or organizational name?
- Are you using or planning to use Nasdaq
data for any reason other than personal use?
If the subscriber can answer "YES" to any
of these questions, Nasdaq considers the person to be a professional
and ineligible for the lower fee rate.
According to the Nasdaq Subscriber
Agreement and Nasdaq Vendor Agreement, the phrase "non-professional"
is defined as follows:
"Non-professional" means, any natural
person who is neither: (a) registered or qualified in any capacity
with the SEC, the Commodities Futures Trading Commission, any
state securities agency, any securities exchange or association,
or any commodities or futures contract market or association; (b)
engaged as an "investment advisor" as that term is defined in
Section 201 (11) of the Investment Advisors Act of 1940 (whether
or not registered or qualified under that Act); nor, (c) employed
by a bank or other organization exempt from registration under
federal or state securities laws to perform functions that would
require registration or qualification if such functions were
performed for an organization not so exempt. The phrase
"Professional Subscriber" means all other persons who do not meet
the definition of Non-Professional Subscriber.
See
http://www.nasdaqtrader.com/Trader/1999/vendoralerts/vadmin1999-6.stm
for a more detailed review.
The August 31, 2001 changes are found here (in bold print):
http://www.nasdaqtrader.com/trader/news/2001/vendoralerts/valert2001-33.stm
Vendors of Nasdaq® real-time market data are required to identify
the non-professional status of any subscriber for whom they are
seeking to pay the lower, non-professional subscription rate for
Nasdaq Level 1 ServiceSM or Nasdaq Quotation Dissemination
ServiceSM.
To qualify for the lower, non-professional
rate, an individual subscriber must be able to answer "NO" to all
of the following questions:
- Are you registered with any state,
federal, or international securities agency or self-regulatory
body?
- Are you engaged as an Investment
Advisor?
- Are you employed by an organization that
is exempt from U.S. securities laws that would otherwise require
your registration?
- Is your Nasdaq Subscriber Agreement
signed in a business or organizational name?
- Are you using or planning to use Nasdaq
data for any reason other than personal use?
If the subscriber can answer "YES" to any
of these questions, Nasdaq considers the subscriber to be
professional and ineligible for the lower fee rate.
The Nasdaq Subscriber Agreement and Nasdaq
Vendor Agreement, definition of the phrase "non-professional" did
not change.
The rule as stated April 20, 2007:
http://www.nasdaqtrader.com/Tradernews.aspx?id=nva2007-033
Distributors of NASDAQ® real-time market data are required to
identify the non-professional status of any subscriber for whom they
are seeking to pay the non-professional subscription rates. NASDAQ
is reiterating its guidance on existing NASDAQ Rules and policies
and is offering further clarity on the ability to classify
non-commercial organizations as non-professionals in certain
instances.
Definition of Non-Professional:
Per the
NASDAQ Subscriber Agreement,
"non-professional" means any natural person who is not:
- registered nor qualified in any
capacity with the SEC, the Commodities Futures
Trading Commission, any state securities agency, any
securities exchange or association or any
commodities or futures contract market or
association;
- engaged as
an "investment advisor," as that term is defined in
Section 202(a)(11) of the Investment Advisors Act of
1940 (whether or not
registered or qualified under that Act)
Please note that the phrase "professional
subscriber" applies to all other persons who do not meet the
definition of non-professional subscriber.
To qualify for the lower, non-professional
rate, an individual subscriber must be able to answer "NO" to all
of the following questions:
|
Question |
Discussion |
|
Is the NASDAQ Subscriber Agreement
signed in the name of a business or
commercial entity? |
Because a non-professional
subscriber must be a natural person,
the NASDAQ Subscriber Agreement1
must be signed by an individual.
If the NASDAQ Subscriber
Agreement1
is signed in the name of a business
or commercial entity, it is
considered professional use.
~ |
|
Is the subscriber a subcontractor or
independent contractor? |
Because subcontractors and
independent contractors are deemed
to be extensions of the firm rather
than natural persons, they are
considered professionals.
If the subscriber is a
subcontractor or independent
contractor or has a business
relationship with the firm, it is
considered professional use.
~ |
|
Is the subscriber a securities
professional? |
If the subscriber is:
- registered with
any state, federal
or international
securities agency or
self-regulatory
body.
- engaged as an
Investment Advisor.
- employed by an
organization that is
exempt from U.S.
securities laws that
would otherwise
require
registration?
Any use by a securities
professional is considered
professional use.
~ |
|
Is the subscriber using or planning
to use NASDAQ data for any reason
other than personal use? |
Any use of data for business,
professional or other commercial
purpose is not compatible with
non-professional status, even if the
commercial use is on behalf of an
organization that is not in the
securities industry. |
- Are you registered with any state,
federal, or international securities agency or self-regulatory
body?
- Are you engaged as an Investment
Advisor?
- Are you employed by an organization that
is exempt from U.S. securities laws that would otherwise require
your registration?
- Is your Nasdaq Subscriber Agreement
signed in a business or organizational name?
- Are you using or planning to use Nasdaq
data for any reason other than personal use?
If the subscriber can answer "YES" to any
of these questions, Nasdaq considers the subscriber to be
professional and ineligible for the lower fee rate.
The Nasdaq Subscriber Agreement and Nasdaq
Vendor Agreement, definition of the phrase "non-professional" did
not change.
5.7) What is UBTI?
The Unrelated Business Taxable Income tax
is imposed on the unrelated business taxable income of most exempt
organizations. The purpose of the tax is to prevent unfair
competition by exempt organizations that could use their tax exempt
status to gain an advantage over taxable businesses. Gross income
subject to the tax consists of income from a trade or business
activity, if the business activity is not substantially related to
the organization's exempt purposes and is regularly carried on by
the organization. The deductions directly connected with the
business income as well as specified modifications are taken into
account in determining unrelated business taxable income. The tax is
imposed at the corporate or trust income tax rates, depending upon
the legal form of the exempt organization.
Capital Gains, dividends, interest, rents,
royalties, and similar payments are normally excluded from the scope
of the unrelated business income tax, but such investment income is
subject to tax if derived from a controlled entity or from
debt-financed property e.g. use of margin debt.
There is an annual deduction that offsets the
first $1,000 of UBTI. The tax on such income is called
unrelated business income tax (UBIT).
Tax-exempt organizations include Self-Employed
401(k) Plans, IRA's, Keogh Plans and other retirement plans.
UBTI is an acronym for Unrelated Business
Taxable Income. UBTI generally occurs when a plan generates income
from operating a business, acquiring or improving property through
debt financing, or certain partnerships from which the plan owns an
interest. Refer to IRC § 512(a) (1).
UBTI is income generated by a trust when
engaging in business activity that is unrelated to its general
purpose. Self-directed IRAs were created for long term investing,
and when it purchases an asset that produces income unrelated to the
intent of the “plan” then that income is subject to taxation – which
means your IRA will be paying taxes on profits generated from your
business purchase.
UBTI is subject to Unrelated Business
Income Tax or UBIT. UBIT is a very steep and complicated form of
taxation. Much like Federal Income Taxes, UBIT is set to a laddered
schedule. However it is compressed on much tighter levels. In 2005,
UBIT is taxed at the following rates:
- $0 - $2,000 = 15%
- $2,000 - $4,700 = 25%
- $4,700 - $7,150 = 28%
- $7,150 - $9,750 = 33%
- Over $9,759 = 35%
UBIT was implemented to keep the playing
field even between plans that open businesses and the typical small
business owners. If a plan or self-directed IRA was able to purchase
a business and did not have to pay any taxes, it would be able to
deliver an identical product at a discount. UBIT mitigates that risk
for the typical business owner.
UBIT is one of the most complicated areas
of taxation in the Internal Revenue Code. It is imperative you seek
professional help to make sure you do not incur any severe tax
penalties.
