topic Re: Transferring Capital Gains to Schedule C for Trader Tax Status in Business & farm

Transferring Capital Gains to Schedule C for Trader Tax Status

fastlapp — Sat, 05 Apr 2025 18:01:50 GMT

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.).

Re: Transferring Capital Gains to Schedule C for Trader Tax Status

AnnetteB6 — Sat, 05 Apr 2025 18:08:48 GMT

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?

Re: Transferring Capital Gains to Schedule C for Trader Tax Status

Mike9241 — Sat, 05 Apr 2025 18:24:29 GMT

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.

Re: Transferring Capital Gains to Schedule C for Trader Tax Status

Rick19744 — Sat, 05 Apr 2025 20:18:44 GMT

A few comments:

While Green's Trader Tax Guide may suggest this, upon audit, they have a name and reputation within the Trader Tax preparation world and would be able to deal with the IRS more easily.
I wouldn't recommend this. If you have all the support and records to support your TTS, then you shouldn't need to worry about an audit.
If you do shift some ordinary gains to Schedule C, you will need to reflect some transactions on form 8949 adjusting the cost basis to net to zero and reflect the gain on Schedule C.
While in the end you net to the same place, it also opens up any potential audit to possibly other items within your tax return. More IRS scrutiny.
Your call.

Re: Transferring Capital Gains to Schedule C for Trader Tax Status

fastlapp — Sun, 06 Apr 2025 17:40:09 GMT

All very helpful. Thank you!

Re: Transferring Capital Gains to Schedule C for Trader Tax Status

fastlapp — Sun, 06 Apr 2025 17:44:59 GMT

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.

Re: Transferring Capital Gains to Schedule C for Trader Tax Status

Rick19744 — Mon, 07 Apr 2025 20:31:57 GMT

Good decision.