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  Copyright© 2004 -2007  Colin M. Cody, CPA and TraderStatus.com, LLC, All Rights Reserved.
 
Disclaimer: The following items are presented for educational purposes and discussion only, responsible commentary including that with a contrary viewpoint is welcome.

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The old forshame web page.


One of the reasons TraderStatus.com was started back in 1999 was to offer an oasis from the glut of well-meaning but sometimes totally meshugeh tax mis-information found on the internet.

Much of the early, bad "advice" on the internet has been purged off - including that which was found on the "reputable sites" that were exposed here over the years.

Those sites have now either completely removed the offending misinformation, or they've corrected their sites to basically mimic some of the facts and ideas that have been found on traderstatus.com for years.

Today what's found on the internet are simple regurgitations of our links Am I a Trader? and
Electing Mark-to-Market? and/or those purveyors who have something directly to sell to traders.  Some of the advice that is offered for free or offered for sale is quite good.  i.e. it does not contradict what traderstatus.com has always offered here for free since 1999!  smile

Those purveyors who have survived are run by people who truly believe they are doing what's best for traders and for themselves.  Each site has it's own answer to problems, but unfortunately several are more interested in selling a trader a boat load of advice and unnecessary & overly complex (or flawed) entity structures.

They are the "ambulance chasers" of the tax advisors world, where high pressure sales talk and widespread blanket advertising support their parabolic internal growth projections, or to support the buyout payment to the original founders.  The operators have not kept up with the ever changing tax laws, rather they have concentrated on marketing their wares.

Much of what they sell is fine for the trader, but it often unnecessarily complex e.g. it creates fees to establish a customized tax plan and the related entities.  Other advice along with their suggested entity structure is actually flawed and is not supported by the law, the regulations, or tax court cases.


Some web sites have recently "discovered" the concept of a type of traders partnership that has been discussed on traderstatus.com since 1999 and has been the mainstay of our tax practice for the past two decades.  These "discoveries" appear to have been lifted right off the partial overview discussions found on traderstatus.com - but because those "discoveries" appear to be primarily based on an overly simplified overview, they are basically flawed and invalid.







The good news is that there still are several sites where traders can find unbiased, accurate and honest advice.  Where traders can trust what they read and not be subjected to a come-on primarily meant to help fatten the founders' pockets.

Some of these sites are (listed alphabetically):
http://www.fairmark.com

http://www.hoven.com

http://www.irs.gov

http://www.nvinc.com

http://www.nysscpa.org

http://www.taxmama.com  (caveat: this site great as a light-hearted starting point for the taxpayer, but it is far too over-simplified to actually act upon)

http://www.taxprophet.com



 



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http://accountant.intuit.com/practice_resources/articwles/tax/article.aspx?file=tmdd_SecuritiesDealers-2

Tax Articles
How Clients Who Are Stock Traders Can Get Same Income Treatment as Dealers
  • Also, the profits will be ordinary income, not capital gain. But, for traders, profits are typically short-term capital gain in any case. So the mark to market election merely turns capital gain taxed like ordinary income into actual ordinary income.

Hmmm this 2007 three-installment article looks like it was copied piecemeal off the traderstatus.com web pages that have been up for 8+.years  But that's it, it looks copied off the web pages from here and there, while missing the boat entirely (as far as their headline goes).

Sure if one were to defensibly nitpick it could be argued that they are correct to some small extent, that the Dealer's income is "ordinary income" - but it is far more correct to tell the whole truth, that the dealer's income is "earned income" and as such is not at all fully like the tax treatment of a trader.  This oversight was possibly made because the author read the 2007 Court Order Acharya, U.S. Ct. App. (7th Cir) where the Judge calls it "ordinary income" while ignoring the fact that it is also "earned income" perhaps because it was not a distinction that made any difference on the tax return in that particular matter.

The fact is that a securities dealer's gains and losses differ substantially from a securities trader's gains and losses in that the dealer has earned income which allows health insurance deduction for the sole practitioner (the sole focus of their article), a retirement plan deduction, and contributions to Social Security.  Whereas a trader's trading gains and losses are not "earned" at all.  Without "earned income" there can be no sole practitioner health insurance, retirement plan deduction, or contributions to Social Security.  (as an aside - on our web site here you'll see that the use of a separate entity is an approach that addresses these issues)

it's ordinary income, not earned income
The significance of the authors missing this subtle difference is the difference between good tax planning and that of having a "total freakin' disaster" after the year is over and the tax returns are filed.


Portions of the above are Copyright © per their original source. All rights reserved and are reprinted here for example and educational purposes only.

 

   
 
Here's an outrageous case of what looks like what could be gross incompetence by a self-proclaimed specialist in trader taxation:

For years an aggressively promoted web site made ridiculous claims to discredit other tax advisors as being shall we say "too conservative" in an obvious attempt to win themselves clients looking for promised exaggerated tax benefits.  What follows are cut and pastes from a "specialist's" web site in 2003 through 2006.  The red and red bold are added to highlight the change in tune once the IRS apparently informed this "specialist" of the facts of life.  What he had read for free on TraderStatus.com years ago wasn't "too conservative"  but was the correct position to take and that the information he had been spoon feeding to the general public for years was ill-conceived and poorly researched.


2003
Here’s a 2003 tax savings idea!
Put $5,000 in your pocket simply by saving $13,788 for your retirement. Hire our firm to quickly form a Retirement Plan and a "single-member LLC" (traders need an entity for a retirement plan). Before year-end, your LLC pays a fee of $15,000 to you, the manager. You then contribute $13,788 to your mini 401k plan by October 15, 200X ($100 by year-end). Click here to learn more.


2003 -
Trader's Roundtable Forum
[regarding entities discussed at an income tax website] I have already been through his tax site and my impression is he knows what he is talking about. However, it appears he wants to pigeonhole clients into a single member LLC entity. It may be a decent entity when viewed through tax goggles, but I am also concerned about people suing me (anyone which endeavors to accumulate money is a valid target). After going through the list of different corporate entities, I feel that an LLC taxed as an S-Corp comes close to ideal for my situation (I don't want to attract too much IRS attention with multiple entities and I don't want to do too much paperwork...).   [on the other hand] TraderStatus.com has a good overview of the different types of entities available to traders and their pros/cons.


2004
New alerts and scams to be aware of involving entites (sic) for traders:
There are two companies in the marketplace you need to stay very clear of. They are promoting strategies that can be very damaging to your tax situation. Click here to learn more.

A "single-member LLC" (SMLLC) is the entity of choice for single business traders:
Click here to learn more.

Single member LLCs:
We can form a "single-member" LLC for you. This can be done quickly, and it will provide you with mark-to-market accounting and the opportunity to create "earned income," which is required for retirement-plan contributions and health-insurance premium tax deductions (from adjusted gross income). An "unincorporated" trader does not have "earned income," and therefore cannot receive any of these tax benefits.

If you missed the mark-to-market accounting election, you can still achieve MTM status for the balance of the trading year, but not for the year to date.
With a new entity, you can elect Mark-to-Market Accounting status "internally" (no IRS filing is required) within 75 days of inception. This will provide you with "tax loss insurance” for the balance of the tax calendar year.

If you want to deduct retirement-plan contributions and/or health-insurance premiums, you need an entity to create "earned income." The simplest, most inexpensive way to do this, without causing any other tax problems, is by forming a "single-member" LLC.

A single-member LLC is a pass-through entity. However, since there is only one member (you), a partnership tax return may not be filed (as would be the case if there were two or more partners). That's good news, since you don't have to spend extra time and money filing a separate tax return for the entity



This fellow's web site was so unprofessional in their apparent grab for more and more clients to pay SMLLC formation advisory fees to them (when the same net result could usually be obtained without the expense of forming a SMLLC and therefore no need for their SMLLC formation services) that they went so far as to personally attack TraderStatus.com for having disclosed that SMLLC's are inappropriate for traders:


2004
Single member LLCs:
Warning notice: One competitor of ours, a single CPA, has gone way out on a limb to try and discredit the use of single member LLCs for traders. Wow is he very wrong and showing his light credentials. He is trying to sell more complex schemes to traders. Watch out, he is active in a trader chat room telling traders about entities. We have found a slew of errors on his site and will report all of them soon.

The basis of his argument is that
SMLLCs, as "disregarded entities" can not qualify for the "new taxpayer" mark-to-market accounting "internal" election, and are not separate entities at all. Wow, is he confusing tax reporting with legal matters.

He figures that since you report a SMLLC on your individual return, it is not a new taxpayer or even a separate legal entity. This is very wrong. The SMLLC files for and gets is own taxpayer identification number, opens its own trading accounts and the owner respects it separate legal entity status. That is a "new taxpayer" and it can file an internal new election for MTM. This other CPA is simply trying to take pot shots at our leadership position and sell some snake oil with complex entities to boot. Look at his credentials and then look at ours. He is all by himself and we have two elite tax attorneys which support our positions. Plus
we have filed hundreds of SMLLC tax returns with our strategies below and they have worked just as designed. Skip that other CPA's advice, it's wrong.

SMLLCs are a good choice for traders. Click here to learn more.



Then in 2006 posters on the internet, claiming to be clients of that firm, disclosed that the IRS is questioning the claimed benefits when using an SMLLC for traders.  A new look at the same web pages shows all the above "entity of choice" and the attack against TraderStatus.com has been removed, and replaced with text that basically parrots the same information available for free here on TraderStatus.com since our web site was established years ago:


a new tune in 2006
Ready for help? Click here.
Start with a consultation first. Click here.

We specialize in entity formations for traders in all parts of the country. Start with a consultation to find out if an entity is right for you. Click here to learn more.

General partnerships owned by family members are the entity of choice providing you don't need entity liability protection. With a GP, the costs are the lowest as there are no state filing fees and in most states no annual minimum taxes. GP's also provide for a "defacto" period giving you more flexibility. Click here to learn more.

Multimember LLCs usually elect to file a partnership tax return like a general partnership except you also have entity-level liability protection. You pay for that by filing with the state and in most states paying a minimum tax and/or annual report fee.

S-Corps are good for single people who can't form GPs or multi-member LLCs. If you are a part-time trader and single, the S-Corp is helpful in attracting less attention from the IRS.

Single member LLCs can be a good choice for many types of clients, but there are some special issues to consider for traders. SMLLCS are disregarded entities, with income, loss and expenses reported on the owner's tax returns directly.



What gall.   An 180 degree turn-around on the use of SMLLC's as "the entity of choice" specifically because they are "disregarded entities" but no apology to the hundreds of innocent taxpayers relying on their web site as it pushed that nonsense for years.  And we understand he has also authored a book that has not been recalled and is still sold on amazon.com filled with more of this SMLLC poppycock of his.

Portions of the above are Copyright © per their original source. All rights reserved and are reprinted here for example and educational purposes only.

 

A looksee in 2014 for yet another change in what really is the entity of choice:

The best types of entities

We like the S-Corp because it pays compensation (officer’s salary) to the owner, which efficiently unlocks health insurance premium and retirement plan contribution deductions.

Avoid wash sales with an entity account

Trading in an entity fixes most of these problems. The entity is divorced from your individual and IRA accounts for purposes of wash sales since the entity is a different taxpayer. (If you have a single-member LLC, you should file an S-Corp election so it’s not considered a disregarded entity.)

Unbelievably, not only does this contradict the libelous statements made against traderstatus.com back in 2004, when the author there apparently was learning tax law while practicing on "hundreds of SMLLC tax returns with our strategies."   But now apparently still on the back side of the learning curve, this same author there claims an entity avoids wash sales.  We may come back in a few years to look for a correction - once the author learns that the IRS has already addressed "this discovery" of using an entity - it is not a valid procedure, pursuant for IRS Code Sec, 267 (also see Sections 1091, 1015, 1211, 152, 302, 362, 408, 671-679,704, 707)


Portions of the above are Copyright © per their original source. All rights reserved and are reprinted here for example and educational purposes only.

 

   
 
It was bound to happen.  This Shame page is for education purposes and to tell the reader to beware of mis-information found on the internet.

The party referred to in the above "Shame" matter took it upon themselves to make another personal attack against traderstatus.com as follows, verbatim:

Where the Code Sec. 475 rules don't apply, a securities dealer inventories securities at (1) cost, (2) lower of cost or market, or (3) market value. ( Reg ß 1.471-5 ) FTC ¸ G-5021 ; USTR ¸ 4754 , USTR ¸ 4714.67

A dealer is one who regularly buys and sells securities to customers (or enters into or terminates positions in securities with customers) in the ordinary course of business. ( Code Sec. 475(c)(1) ) FTC ¸ G-5023 ; USTR ¸ 4754 If one's sole business is trading in securities he's not a dealer FTC ¸ I-7656 ; USTR ¸ 4754 (but for the mark-to-market election by traders, see ¸ 2883 ).

[ ] Observation: Some of our competing trader tax sites have suggested that a direct-access trading (sic) on (sic) ECNs could argue that they are a dealer in securities and claim to use MTM, even if they missed the election. Well here is the tax law that clearly states they can not consider them self (sic) a dealer is (sic) their sole business is trading in securities and they do (sic) act otherwise as a dealer with customers. So stay clear of these other trader tax sites and their troubling advise (sic) in this regard. (Colin Cody of TraderStatus.com had recommended (sic) this strategy).

© Copyright 2003 RIA. All rights reserved


Their reference to the traderstatus.com paragraphs are found here: http://traderstatus.com/dealer.htm#ECN




And then not to leave well enough alone, their English grammar was cleaned up and in 2007 can be found:


We disagree entirely and think you are getting yourself into potential tax trouble if you try this "dealer with MTM" tax strategy. To be considered a "dealer" by the IRS, you must have "customers." In our opinion, it is a real stretch of logic and poor professional judgment to advise traders that they can qualify as dealers because they trade exclusively on ECNs. If you visited that other expert’s site and have questions about this strategy, feel free to e-mail us for more help.


To clear up the vicious marketing hype in the attacks above vs. the reality, the following "rebuttal" is made:

Obviously in their quest to obtain more clients to generate more commissions from their referral service while belittling traderstatus.com the "firm" failed to read the statement in red font, no less "Individuals who buy and sell securities for themselves generally are considered traders and not dealers."  click here for original source.

While one should leave it alone right there, that the clear in-your-face evidence shows that that "firm" has no credibility whatsoever, we'll continue, as that "firm" may claim they are colour blind and did not see the red font text...

So here goes...
Clearly if one were to read the above link, there is no "recommendation to use" the concept.  The above link merely provides information for educational purposes and states that the concept "has not been challenged in the courts as of yet. [update see
Acharya, U.S. Ct. App. (7th Cir., 2007) ]   It is therefore arguable... [that this] meets the 'to customers' test qualifying you to file as a Dealer in Securities." The concept on the webpage is a thought for discussion and for education, but nowhere is it a gratuitous "recommendation" to sight-unseen readers of this website.  How asinine, to suggest it is a "recommendation"!    Going a little deeper one might say that it could just a easily be "a warning" rather than a "recommendation" since nowhere is it started that "dealer status" is somehow better than "trader status."


The first attack itself is a circular argument "
the tax law that clearly states they can not consider them self (sic) a dealer is (sic) their sole business is trading in securities..."  Well, duh!   ;-)  Of course if your sole business is being a securities trader - then yup, by golly, I guess you are not a securities dealer then.


The second attack similarly is a circular argument "...to advise traders that they can qualify as dealers..."  Well logically a trader's activity is not the activity or a dealer, just as a dealer's activity is no the activity of a trader.  On a deeper level, the argument shows a total lack of the understanding of the real issues in IRS Circular 230 that CPAs must practice under.    That author also misses the point completely as shown by the pejorative implying that that  "traders [might] qualify as dealers"  rather than, for example, stating that  "dealers [might] qualify as traders"  This pejoratively implies that somehow being a dealer is preferable to being a trader.   When obviously for some taxpayers they are a trader and heck, maybe they'd rather be a dealer and yet for other taxpayers they are a dealer and maybe they'd rather off as a trader.  One classification is not necessarily "better" rather they are merely "different" and taxpayers [and that "firm" no doubt] would be wise to recognize the difference.

There are court cases where it was determined that the taxpayer was a dealer and not a trader, just as there are court cases where it was determined that the taxpayer was a trader and not a dealer.  There should be no pejorative here at all.  No taxpayer should try to trick the system to be a dealer, especially when a dealer might put the taxpayer is a far worse position than would a tax position as a trader.

But perhaps this is reaching too far considering the source.  ...as that "firm" may simply be seeking to drum up interest in their boiler room tax return referral service to obtain paying clients so they can grow with increased referral commissions [consider, their offer to email them to discuss information found on traderstatus.com]  ;-)


technical discussion:

In all due respect, there are subtleties discussed within the above link that perhaps one needs to be a practicing income tax professional as well as someone intimately familiar with both the operations of securities dealers and with online securities trading platforms to pick up on.

the online trading platform portion of the concept:
The concept discussed is about the subtle difference between trading "to" a market maker and trading "through" an ECN. By the very nature of ECN operations, the ECN itself does not take positions as would a market maker.  If you do not fully grasp and understand these concepts, then there's truly no need to read any further.

the operations of a securities dealer portion of the concept:
Further, is trading "through" an ECN substantially similar to a dealer transacting business as "agency" or rather as "principal?" (it would be one or the other).  Again, if you do not fully grasp and understand these two concepts of a dealer's back office operation, then there's absolutely no need to read any further.

the income tax professional's portion of the concept:
Following that thought then, therefore is the IRS's "to customers" rule met and if so, is this a key enough issue in defining the difference between a §475 trader vs. a §475 dealer?

Regardless of the thoughts of these concepts all taken together, the resulting answer is merely food for thought to discuss and to draw conclusions about, since this area has not been addressed by the courts as of yet.   If the conclusion by the IRS is that the taxpayer is in fact a dealer, then they could be assessing substantial additional self-employment taxes against the taxpayer  This is because generally, non-dealers (i.e. traders) are exempt from self-employment taxes, whereas a dealer must pay self-employment taxes.

Additionally, the IRS could be seeking substantial additional income taxes against the taxpayer.  This is because generally, non-dealers (i.e. traders) are exempt from paying taxes on paper gains for positions not yet closed, whereas a dealer must pay taxes on paper gains.

If the taxpayer has losses, dealer status would require ordinary loss treatment, rather than limiting the deducible losses to a maximum net of $3,000 per year.

If the taxpayer has gains, dealer status would require ordinary gain treatment, rather than allowing prior year capital loss carryforwards to offset the current year gains.

And finally if the taxpayer has dealer status he is exempt from the wash sales rule.

It should be noted here that a non-dealer, a securities trader, may optionally elect §475 M2M which generally means paper gains/losses are taxed as ordinary and the wash sales rule is ignored.

Portions of the above are Copyright © per their original source. All rights reserved and are reprinted here for example and educational purposes only.

 

   
 
Here's a case of a tax adviser providing "advice" about matters that even a first year H&R Block temporary worker would know.

OK, let’s just break this down to make it easier. Securities include but are not limited to:
  • Exchange Traded Funds (ETFs) including QQQ, DIA and SPDRs;
  • Stocks, stock options, mutual funds, and bonds;
  • Single stock futures, otherwise known as "non-dealer securities futures contracts;"
  • By default, any "capital asset" that is not otherwise defined as an IRC Section 1256 contract (a commodity) or IRC Section 988 (currencies, inter-bank foreign exchange or FOREX). For example, gold bullion sounds like a commodity or currency, but physical gold is neither included in IRC section 1256 or 988, and it’s taxed like securities. That means if you hold gold bullion bars for more than 12 months, you are entitled the lower long-term capital gains rate (currently 15 percent).

 

This advisor, obviously did extensive "research" of the law on his own to come to his conclusions.  But a promoter working on referral fees while masquerading as a licensed practicing CPA firm and then working on some cockamamie tax theory in a vacuum can be very dangerous.  In fact, the maximum long-term federal tax fate for gold bullion is 28% not 15%.
Can you imagine relying on misinformation like this?  Investing in gold bullion, expecting low a 15% capital gains tax, when in fact your tax liability would be 86% greater than planned?  It's scary.

 

Topic 409 - Capital Gains and Losses
Capital gains and deductible capital losses are reported on Form 1040, Schedule D.  If you have a net capital gain, that gain may be taxed at a lower tax rate. The term "net capital gain" means the amount by which your net long–term capital gain for the year is more than your net short–term capital loss. The highest tax rate on a net capital gain is generally 15% (or 5%, if it would otherwise be taxed at 15% or less). There are 3 exceptions:

The taxable part of a gain from qualified small business stock is taxed at a maximum 28% rate.

Net capital gain from selling collectibles (such as coins or art) is taxed at a maximum 28% rate.

The part of any net capital gain from selling Section 1250 real property that is required to be recaptured in excess of straight-line depreciation is taxed at a maximum 25% rate.

408(m)(2) Collectible Defined
For purposes of this subsection, the term "collectible" means--
408(m)(2)(A) any work of art,
408(m)(2)(B) any rug or antique,
408(m)(2)(C) any metal or gem,
408(m)(2)(D) any stamp or coin,
408(m)(2)(E) any alcoholic beverage, or
408(m)(2)(F) any other tangible personal property specified by the Secretary for purposes of this subsection.

 

   
   
 

   
   
   
   

 


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