topic Capital gains in Investors & landlords

Capital gains

Atifchaudhry01 — Tue, 09 Mar 2021 18:38:23 GMT

Hi I do daily future trades with E*TRADE and I want to know if I should classify myself as a day trader or investor, I am currently estimating to making 250K for the year

Re: Capital gains

ColeenD3 — Tue, 09 Mar 2021 21:50:22 GMT

It isn't a matter of just deciding that you are a day trader. There are steps.

Special rules apply if you're a trader in securities, in the business of buying and selling securities for your own account. The law considers this to be a business, even though a trader doesn't maintain an inventory and doesn't have customers. To be engaged in business as a trader in securities, you must meet all of the following conditions:

You must seek to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation;
Your activity must be substantial; and
You must carry on the activity with continuity and regularity.

The following facts and circumstances should be considered in determining if your activity is a securities trading business:

Typical holding periods for securities bought and sold;
The frequency and dollar amount of your trades during the year;
The extent to which you pursue the activity to produce income for a livelihood; and
The amount of time you devote to the activity.

If the nature of your trading activities doesn't qualify as a business, you're considered an investor and not a trader. It doesn't matter whether you call yourself a trader or a day trader, you're an investor. A taxpayer may be a trader in some securities and may hold other securities for investment. The special rules for traders don't apply to those securities held for investment. A trader must keep detailed records to distinguish the securities held for investment from the securities in the trading business. The securities held for investment must be identified as such in the trader's records on the day he or she acquires them (for example, by holding them in a separate brokerage account).

The Mark-to-Market Election

A trader must make the mark-to-market election by the original due date (not including extensions) of the tax return for the year prior to the year for which the election becomes effective. You can make the election by attaching a statement either to your income tax return if filed without an extension or to a request for an extension of time to file your return. The statement should include the following information:

That you're making an election under section 475(f);
The first tax year for which the election is effective; and
The trade or business for which you're making the election.

https://www.irs.gov/pub/irs-pdf/i3115.pdf

Re: Capital gains

Atifchaudhry01 — Tue, 09 Mar 2021 22:27:27 GMT

What do I need to do to treat this as a business income. I am working from home and also investing at the same time can I deduct my investment gain and take business related expense like a portion of my rent, utilities investment related meals and entertainment related expenses

Re: Capital gains

ColeenD3 — Tue, 09 Mar 2021 22:37:46 GMT

You can't. The procedure was described in my post. You have to file a Mark-to-Market election. To be effective for 2020, you would have had to file before April 15, 2019.

Re: Capital gains

Atifchaudhry01 — Tue, 09 Mar 2021 22:55:48 GMT

Should I create a business for 2021 and do all my investment under the business name to be able to deductions I mention. Trying to reduce the amount of tax that I am having to pay. My estimated earning can be upwards of 500K for year 2021. Is there anything I can do to reduce the amount of tax I have to pay

Re: Capital gains

ThomasM125 — Tue, 09 Mar 2021 23:24:52 GMT

You are required to treat the activity as a business if it qualifies as such. As a business you have choices as to what entity to operate under, an LLC, sole proprietorship, S or C corporation. Your choice of entity can have a significant impact on your tax liability. It may benefit you to consult with a tax expert.

Re: Capital gains

fanfare — Wed, 10 Mar 2021 01:46:27 GMT

you don't have to elect MTM to file as a Day Trader.

You do have to actually be a business,

you meet the activity conditions,

and it is your primary source of income.

Otherwise you are just a regular active investor and you will get audited.

Re: Capital gains

fanfare — Wed, 10 Mar 2021 02:16:59 GMT

A sole proprietorship, Schedule C, is a business by declaration.

No other paperwork is needed.

If it doesn't make money regularly, IRS will treat it as a Hobby.