are you a professional trader where your main source of income is trading or are you just an investor whose primary source of income is from other sources?
The IRS classifies you as either an investor or a trader. (There is also a classification for dealers, but you are not a securities dealer.) Under the tax reform law, investors cannot deduct investment expenses for 2018 through 2025, except for margin interest with some limitations. Traders can deduct investment expenses as business expenses. See the following topic on the IRS web site for a discussion of what makes someone an investor or a trader, and some of the record-keeping requirements for traders.
Topic No. 429 Traders in Securities (Information for Form 1040 or 1040-SR Filers)
There is no precise definition of a trader. The IRS web page describes the factors that are taken into consideration in making the determination, but the descriptions are vague. There are no bright lines or hard and fast rules. If you claim to be a trader, you can expect the IRS to question that claim. Note that you could be considered a trader even if securities trading is not your primary source of income. On the other hand, you could be an investor even if investing is your primary source of income.
If you think you qualify as a trader, you should consult a tax professional before filing your tax return. If you are an investor, you cannot deduct your laptop, home office, or other investment expenses other than margin interest.
Thanks this was helpful. I think I am a trader. Not sure how much you know about robinhood. its a fee-free brokerage stock firm based on iphone apps. I buy and sell my own stocks daily. I spend alot of time research & buy & selling. On daily average, I spend 6-8 hrs on stocks.
my question is that I get 1099-B from robinhood. How do I enter this on my schedule C? when I enter my 1099-B info into my tax return, it generates Schedule D. But I want to put it on my Schedule C. I know when I get 1099-MISC from contractor job, I know how to convert that to Schedule C. Little confuse about 1099-B treatment as Sch C. I have all the evidence to proof I am trader. Robinhood sends monthly statement, which shows my account activity.
As a trader you do not report your 1099-B transactions on Schedule C. You report them on Schedule D, the same as if you were an investor. You report only expenses on Schedule C. That's what allows you to deduct investment expenses that would otherwise not be deductible.
I again recommend that if you are filing as a trader you should consult a tax professional. You should also discuss with the tax professional the specific expenses that you want to deduct. In particular, there are a lot of detailed rules regarding deductions for a computer and a home office. The tax professional can also give you guidance as to what other expenses might be deductible.
right, thats what I said, my 1099-B gets reported on Sch D. How do I get to deduct my ordinary expenses such as my laptop? Do I need to form LLC?
Thanks again!
I think what you have to do is enter a stock-trading business that has no income, and enter your trading expenses as business expenses. But the tax professional that you consult will be able to tell you exactly how to do it in a way that does not look like a money-losing business to the IRS.
You do not form an LLC.
You cannot deduct the full cost of the laptop unless you use it 100% exclusively for trading or recordkeeping for your trading, with no personal use at all. No personal email, no Facebook, no Skype, etc. The tax professional that you consult will be able to tell you how much you can deduct, and advise you whether to deduct it all in the year of purchase or depreciate it over a number of years.
The fact that you use Robinhood is irrelevant.
Here's info from about whom the IRS considers a trader and where to report security transactions - Schedule D if no mark-to-mark election form 4797 if there is one in effect.
Traders
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; (I think this is a key point - mostly buy and hold and the IRS is likely to consider you an investor); and
Your activity must be substantial (lots of trades and total $ involved); 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; (one could say generally short term like a day or even less but sometimes longer - based on the trading activity of traders for whom I've prepared tax returns - some even liquidate every position at the end of the day so they aren't subject to overnight market risk - consider that the Dow sank over 600 points on 10/26/2020)
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).
Traders report their business expenses on Schedule C (Form 1040 or 1040-SR), Profit or Loss From Business (Sole Proprietorship) PDF. Commissions and other costs of acquiring or disposing of securities aren't deductible but must be used to figure gain or loss upon disposition of the securities. See Topic No. 703, Basis of Assets. Gains and losses from selling securities from being a trader aren't subject to self-employment tax.
The Mark-to-Market Election
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 or 1040-SR), Capital Gains and Losses PDF and on Form 8949, Sales and Other Dispositions of Capital Assets PDF 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 PDF. Neither the limitations on capital losses nor the wash sale rules apply to traders using the mark-to-market method of accounting.
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. (so you can't use the MTM election for 2019 unless there was a proper election with your 2018 return or extension filed by 4/15/2019, similarly, you can't use the MTM election for 2020 since that was due with your 2019 extension that had to be filed by 7/15/2020. so the first year would be 2021 - due with 2020 timely filed return without extension or attached to 2020 timely filed extension) 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 (that is, the tax year for which a timely election is being made); and
The trade or business for which you're making the election.
Refer to the Instructions for Schedule D (Form 1040 or 1040-SR), Capital Gains and Losses PDF for more information on how to make the mark-to-market election. It's important to note that in general, late section 475(f) elections aren't allowed.
After making the election to change to the mark-to-market method of accounting, you must change your method of accounting for securities under Revenue Procedure 2019-43 PDF, Section 24.01. In addition to making the election, you'll also be required to file a Form 3115, Application for Change in Accounting Method PDF. Publication 550 PDF describes the procedures for making an election under the section called "Special Rules for Traders in Securities." Non-filing of the Form 3115 mentioned above won't invalidate a timely and valid election.
If you've made a valid election under section 475(f), the only way to stop using mark-to-market accounting for securities is to file an automatic request for revocation under Revenue Procedure 2019-43, Section 24.02. Under that revenue procedure, the request for revocation must be filed by the original due date of the return (without regard to extensions) for the taxable year preceding the year of change (the year of change is the first taxable year the revocation is to be effective). This revocation notification statement must be attached to either that return or if applicable, to a request for extension of time to file that return. Late revocations won't generally be allowed except in unusual and compelling circumstances.
@Anonymous
I created an dummy tax copy 2019. to see how it will be presented. See Sch C and Sch D and 1040