I am filing as an individual claiming Trader Tax Status (TTS) and am not claiming a 475 election. One of the issues with TTS is that all trading related expenses are deducted on Schedule C, but all income is short term cap gains on Schedule D / Form 8949. This results in a Schedule C with only expenses and no income, which can raise the risk of an audit (looks like a “hobby” business etc.).
CPAs I have talked with say that to lower audit risk, they transfer trading gains otherwise reported on Schedule D to “other income line” on the Schedule C to “zero” out the Schedule C. It’s a prevalent practice among CPAs catering to traders, even mentioned in the well-regarded “Green’s Trader Tax Guide”.
Is it possible to do this in Turbotax? Would I just not report some gains on Schedule D and instead report it on Schedule C? Taxes are the same, I just want to minimize red flag risk.
And, yes, I qualify for TTS (200+ trades a day, <1 month hold time, full-time job for five years now, etc. etc.).
Here is a TurboTax help article to use as a guide for entering your trader status using TurboTax:
How do I report my trader activity with or without Section 475(f) election in TurboTax?
i also worked for CPA firms that handled traders that did not make the 475F election. The IRS should be getting form 1099-B. The proceeds on it will differ from the proceeds you report on Schedule D/Form 8949 as will the cost of the securities. HIGHER AUDIT RISK I think. on schedule c you'll list activity as securities trader with business code 523000
I not sure how you could move items to schedule C. if you move proceeds where do you move the cost?
so which presents the higher audit risk. Don't know. But I can tell you that a difference in proceeds reported on 1099B and schedule D usually generates correspondence.
as an aside traders that make the 475f election report there trading on form 4797 which flows to schedule 1 not to schedule c so they also present large losses on schedule C.
The decision is yours.
A few comments:
Thanks, this is very helpful. Good points on where to report cost basis. I have a bunch of non-covered proceeds on my various 1099-B's, so I think proceeds will mismatch anyway from what's reported to the IRS (although I'm attaching the 1099's to the return). But I guess that's irrelevant to this discussion. I think you're right - I'll just do the Schedule C with no income, it should be pretty clear that it is for TTS with business code 523000 and the tens of thousands of trades reported on 1099s.