Day Trader expenses offset capital gain

[stech]

I am a day trader. I have expenses and LLC too. How do I enter my income (capital gains) offset my expenses in Sch C? 

My expenses is my office rent (not home), 100% used for business.

If I enter 1099-B, which is Sch D, how does this offset Sch C? 

[GeorgeM777]

As a day trader you are in the business of buying and selling securities.  Because you are in a business, the transactions on your 1099-B represent your business income or loss and as such, those gains/losses are reported on a Schedule C, line 1, Gross receipts or sales.  

Because it appears you have a business, you will likely be using TurboTax Self-Employed or TurboTax Home & Business, and both of those applications have sections where you will enter your business expenses, such as your office rent.

Whether you choose to upload your 1099-B will probably depend in large part on whether any of the transactions contained therein are not part of your day trading business.  If any transactions on your 1099-B are not part of your day trading business, then you can enter them manually (this may be possible if you only a few transactions) or you can upload your 1099-B, and then delete those transactions that are not part of your day trading business.  This may sound a bit confusing, but we don't know whether you have a separate 1099-B for your day trading business and another 1099-B for your non-day trading business, or if you have just one 1099-B which contains all of your trades.  

As noted above, if all of your transactions on your 1099-B were effected as part of your day trading business, then you will just need your total profit/loss number and that will be entered on your Schedule C as your gross receipt or sales number.  Because these transactions are now part of your business, (capital gain/loss tax no longer applies) you will pay income tax on any business profit, as well as self-employment tax (Social Security and Medicare).  TurboTax will calculate the amount you can deduct from your return based on the amount of self-employment taxes you are required to pay.  

@stech

We need to amend the prior response to include the following information obtained from the IRS website which relates to the Section 475 election and it also relates to how gains and losses from trading should be characterized.

"Traders can choose to use the mark-to-market rules, investors can't. If a trader doesn't make a valid mark-to-market election under section 475(f), then he or she must treat the gains and losses from sales of securities as capital gains and losses and report the sales on Schedule D (Form 1040), Capital Gains and Losses and on Form 8949, Sales and Other Dispositions of Capital Assets as appropriate. When reporting on Schedule D, both the limitations on capital losses and the wash sales rules continue to apply. However, if a trader makes a timely mark-to-market election, then he or she can treat the gains and losses from sales of securities as ordinary gains and losses (except for securities held for investment - see above) that must be reported on Part II of Form 4797, Sales of Business Property. Neither the limitations on capital losses nor the wash sale rules apply to traders using the mark-to-market method of accounting."

Below is the link to the IRS webpage from which the above information was obtained. 

Traders in Securities

[Edited 02/23/22|3:41pm PST]

[Rick19744]

@GeorgeM777 as a day trader, the taxpayer would only reflect expenses on Schedule C.  Capital gains, losses are still reflected on form 8949 and Schedule D.

If the taxpayer has trader tax status (TTS) AND makes a timely Section 475 election, those gains and losses would be ordinary and then be reflected on form 4797.

[stech]

I agree. Capitals gains are on Sch D & not on Sch C. 

My question, how do it offset? My Sch C would always show loss if I follow this approach?

[ColeenD3]

Yes, Schedule C will show a loss. There is no way to have the income and expenses directly offset. The fact that you have numerous short trades and the designation of Trader on Schedule C will notify the IRS.

[Rick19744]

@stech 

As has been noted, the two schedules will flow into your tax return just like any other taxpayer.

Your Schedule C will reflect losses and flow to schedule 1 which will in turn flow to page 1 of the 1040.

Any losses on Schedule D will flow to page 1 of your 1040.

Keep in mind, that just because you claim to have TTS, your capital gains and losses will be treated just as any other taxpayer.  This means the maximum capital loss you can take in any year is $3,000 (should your capital losses exceed your capital gains).  Any remaining capital losses will be carried forward.

You should also note that having a Schedule C with losses increases your scrutiny of IRS algorithm for audit.  Doesn't mean you will get an audit, it just increases your chances.

Make sure you understand what the IRS looks for in a trader (TTS) and make sure you have this documentation ready should the IRS question your trader status. 

[stech]

How do I designate myself a Day Trader on Sch C. Is it per business description?

[stech]

@Rick19744 

I have not made the election to be TTS.  I have over 1000 trade transaction to be considered day trader. most of these trades are open & closed on same day. 

someone told me that I can use Form 8829 (home use of biz)  and not use Sch C which will show losses every year.  On F 8829,  Other income including Schedule D and Form 4797. Thats where I can report my Sch D as well. Then my expenses there. I rent an office (not home) so I have $12K rent expense. I do have enough capital gain even after all expenses.

[Rick19744]

The business description should clearly note that you are a Securities Trader.

You should also use code 523210 in box B (you aren't a dealer or a broker so this is the best option).

There is no election for TTS.  Purely based on facts and circumstances.

The only election would be for Section 475 mark-to-market.

Schedule C is where you report your trade or business expenses.

Form 8829 is used if you had a room in your house that you were using exclusively for your TTS business, which would then determine the allowable expense for that area used for your business.

And yes, you will show losses every year on Schedule C.  That is why I noted you will have higher IRS scrutiny and that you need to have your support documentation available NOW should you receive a letter on this matter.

[stech]

@Rick19744  Can I use 8829 for my business rent office? (Not home) I have a rental office space away from home

[Rick19744]

No.  Those rent expenses would go on your Schedule C.

[sectrader]

One way to offset expenses from capital gains is to create a dummy brokerage account called "Transfer to Schedule C", something like this

Broker Name	...	...	...	Gain/Loss
My Real Broker	...	...	...	100000
Transfer to Sch. C	to my trading business			-40000
			Total	60000

Then in Schedule C, enter 40000 as Gross Receipts and Sales. If your expenses is $30K (rent, equipment, advisory, your salary and benefit, payroll tax, etc), your business will have a net profit of $10K.

This way, the $60K will be taxed as capital gain, while the $10K as ordinary income. Without this "Dummy brokerage", you will have 0 gross receipts in Schedule C, and a net loss for the business, sounds pretty weird.