Day Trading Resources

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What to Know About Taxes Before Structuring Your Trading Business

So, you’ve decided to make day trading your full-time career. If you’re truly prepared for the job, there are a lot of potential benefits to the choice you’ve made. You get to work from home, be your own boss and you have the opportunity to make a good deal of money.

But there are also some decisions you’ll have to make before you begin actively trading and some things you’ll have to know about taxes and how they work for day traders. This includes decisions you’ll have to make about how to structure your trading business. Here are some things to know about taxes for traders before you get started:

Trading vs. Investing

It’s important to know up front that just because you consider yourself a day trader does not mean the IRS will see things the same way. There are a few specific things they look at to determine if you’re more of a trader than a long-term investor. There are important tax ramifications to this distinction.

The difference, essentially, is that investors make their money from dividends, interest and capital appreciation while traders make theirs from daily stock movements. In simpler terms, it’s a long-term strategy vs. a short one. If you want to be considered a trader by the IRS, you have to be able to show you make trades regularly and have a substantial number of trades made. Important factors in helping the IRS determine your status will include the frequency and dollar amount of trades, how long you hold your positions, the amount of time devoted to trading and whether it’s the means by which you support yourself.

If you do meet the requirements, you’re going to have to decide how exactly you want to structure your business. There are a few choices available to you.

Sole Proprietorship

If you don’t set up a structure for your trading business, you will be considered a sole proprietorship. There are some tax benefits, but there are drawbacks as well. Essentially, there will be no financial difference between you as an individual and you as a trader. You will file only one tax return for all of your financial activity in a given year. This means that there is no legal separation between you and your business. You will be solely responsible for taxes owed, trading debts and other obligations.

Creating a Business Entity

Creating a business entity is more expensive and time-consuming up-front but can pay off in the long term. One of the biggest advantages to doing so is you’ll file separate tax returns for your business and yourself as an individual, even if you’re the only employee of the business. This allows the IRS a better look at the financials of your trading business, which can help you avoid headaches in the long term.

One type of business structure you can choose is an S corporation. The benefit of choosing this is it allows you to deduct your retirement plan contribution and health insurance from your taxes. Another option is forming a C-corporation. Under this structure, profits tend to come in the form of salary and dividends. The income from trading is taxable to the corporation, not the individual owner. These corporations offer greater flexibility, but also require more work.

Traders may also choose to form a limited liability company or LLC. As the name suggests, this can help shield you from personal liability. Trading businesses which have at least two members have the option to be taxed as an LLC partnership. Under this structure, the LLC files a tax return, but the income or loss from trading goes directly to the members and is reported on their individual tax returns.

If you’re a trader looking to turn your activities into a legal business entity but need help with structuring that business, Traders Accounting is here for you. We have three different business entity packages to choose from based on the needs of your business. Depending on the package, you’ll get such benefits as bookkeeping services, mark-to-market coaching, a home office deduction, free first-year federal and state tax returns and more. Call 800-938-9513 to learn more today.

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Why Traders Should Outsource Their Bookkeeping

Being an active trader is a busy job. You have to be laser-focused on your work throughout the day to make all the transaction you need to. You need to stay informed of the latest news and trends in the market to ensure that you’re buying and selling at the right time.

But you also need to keep accurate records throughout the year so that you’ll be fully ready when tax season rolls around. Good bookkeeping will ensure that all the relevant information and paperwork you need will be ready come tax time. The problem is it’s not easy to find the time to maintain those records over the course of the year. There are only so many hours in the day and you likely already spend many of them on your trading.

Not only that, but bookkeeping for an active trader can be very complex. Especially at the end of the year when pending’s and washsales need to be configured and accounted for.

We highly recommend outsourcing your bookkeeping to an accounting firm that handles taxes for traders. Here are some benefits to doing so:

Take Advantage of Tax Expertise

Even if you don’t find maintaining your own records to be too much of a burden, you still likely could use the tax expertise that comes with outsourcing your bookkeeping. The person or firm you hire will have a lot of valuable knowledge when tax season comes. Knowing what expenses to deduct is absolutely key to ensuring that you don’t pay any higher a tax bill than is necessary.

Tax and deduction rules can be complicated, especially for traders. For example, some expenses will require more than a receipt in order to be deductible. The Internal Revenue Service can be more strict with traders than other types of business expenses. In addition to handling all of this, a tax professional can help point out any potential expenses you didn’t think to originally include.

Save Time and Reduce Your Burden

Being a trader and not hiring an outside bookkeeping service means spending countless hours throughout the year trying to stay organized and still not being as efficient as you’d be with outside help. Why continue to manually deal with statements and paper receipts when a professional can handle all of that for you. This comes in handy not just during tax season, but all year round. If you’re audited by the IRS someday, you won’t have to wonder where all your old documents are or have to worry if you’ve kept all relevant files. A professional will have already taken care of that for you.

Stay on Top of Your Finances

The benefits of going with an outside bookkeeping service extend beyond just tax season. You’ll receive monthly financial reports so that you’ll always have a good understanding of where you stand at any given moment. You’ll have useful financial data throughout the year that will help you make the best possible decisions for your business. All of your financial information will be accurate, up-to-date and easily accessible.

Be a Better Trader

Let’s be honest: you have the career you do because you’re a good trader who understands the market, not because you’re good at keeping records. That should be your focus when you’re on the clock. The more time you spend trying to get organized or find a receipt here or research whether you can deduct a certain expense there is time there, the less time you’re spending doing your actual job. If you want to spend less time on record keeping, get a better tax return and have a better understanding of your finances, outsource your bookkeeping.

If you’re in the market for active trader bookkeeping, Traders Accounting is the first place to look. We will reconcile all your accounts to comply with IRS standards. We will consult with you to review financial reports and answer any questions. Your monthly financial update will include a balance sheet and income statement, as well as any other detailed reports that you need. Of course, our seamless tax preparation will also ensure you’re IRS compliant.

Call 800-938-9513 today to let us ease your burden.

 

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Should Traders Take the QBI Deduction?

If you’re a full-time trader working in the United States, you might have heard of the Qualified Business Income Deduction. This relatively new deduction has allowed certain business owners to save money on their taxes. You may be wondering if you qualify for the deduction. Here’s what you need to know:

What is the QBI?

The Qualified Business Income Deduction – also referred to as Section 199A – allows eligible taxpayers to deduct up to 20% of their qualified business income, 20% of their qualified real estate investment trust dividends and qualified publicly traded partnership income. This deduction was created by the 2017 Tax Cuts and Jobs Act.

According to the Internal Revenue Service, qualified business income is the “net amount of qualified items of income, gain deduction and loss from any qualified trade or business.” This can include partnerships, S corporations, sole proprietorships, and certain trusts.

Essentially, you are eligible for this deduction if you own what is known as a pass-through business, meaning your business is not on the hook for corporate income tax. Instead, your business reports its income on the individual tax returns of the owners and is taxed at an individual rate.

Who Doesn’t Qualify?

The list of who doesn’t qualify for this deduction is fairly extensive. Qualified business income does not include investment income, capital gains or losses, dividends, income earned from businesses outside the United States or interest income.

If your taxable income is higher than $429,800 while filing jointly or $214,900 while filing solo, you do not qualify. Additionally, any owner of a business that is a specified service trade or business can’t claim the deduction, no matter how much or little they earned in a given year. This includes, but is not limited to, the field of health, accounting, law, athletics, consulting, investment management and, yes, trading.

So, if you’re a full-time trader, don’t bother worrying about the QBI next time you file your taxes as you will not be granted the deduction. And if you need any assistance with your taxes, bookkeeping or any other accounting services in the future, Traders Accounting is here for you. Our tax professionals can help make a complicated process simple for you. Call 800-938-9513 to learn more today.

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What to do When Closing Your Business

A sign indicates that a business is closedShutting down your business can be tough emotionally. Maybe it’s something you’ve run for a longtime and you just don’t have the time for anymore. Or perhaps you had a dream that never really got off the ground.

Regardless of the situation, there are a few things you’re going to want to do when closing your business to ensure your finances and interests are protected. Here’s what you need to do if you plan on closing your business.

Make the Proper Cancelations

If you’re closing your business, you likely won’t need any registrations, permits or licenses anymore so be sure to cancel any of those you currently have. Also cancel your trade name, if you happen to have one, to help ensure your business identity is not stolen in the future, as this can cause major liability.

Dissolve Your Business

It’s important to legally dissolve your business in the state you originally opened it in. Failure to do so can lead to either fraud, unpaid taxes, unpaid annual reports, etc. all being due, in order to shut down the business at the state level. At the federal level, if a final return is not completed this will mean that your business will still legally have to file taxes, even if you’ve made no money. If you don’t file, you’ll be subject to penalties that can add up to more than $2,000 annually, depending on the entity.

Tie Up Loose Ends

Now that your business is closing, it’s time to resolve any outstanding financial obligations you may have. If the business owes any money to investors, employees or anyone else, now is the time to make those payments. File your income tax returns for your final year in business, inform your state and federal tax agencies that you’ll no longer be in business and cancel your employee identification number. There is a very specific way you need to shut your business down and there are time frames that you must adhere to. Please feel free to reach out to us at Traders Accounting if you need assistance with this.

If you’re considering closing your business and feel overwhelmed by the various responsibilities, Traders Accounting is here for you. Our professional staff can help ensure that you’ve got everything covered before you shut down. Call 800-938-9513 to learn more about how we can help you today.

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Do You Have to Pay Taxes on Bitcoin and Crypto?

Bitcoin and cryptocurrency in general have exploded in popularity over the past few years. Millions of Americans have bought, sold and used cryptocurrency for a variety of purposes.

Those who are new to the crypto world might wonder whether there are any tax implications to buying, selling and using Bitcoin and other cryptocurrencies. The answer to that question is yes. Here are some examples of when you may have to pay taxes related to your cryptocurrency activity:

Using Bitcoin as Compensation

Do you own a business that accepts Bitcoin as a method of payment? Are you an independent contractor who has received Bitcoin as payment? Are you an employee of a business that pays at least partially in Bitcoin? If you said yes to any of these, that Bitcoin you received is considered taxable income by the IRS.

Cryptocurrency Transactions

The IRS considers cryptocurrency property. You don’t have to pay a tax when you buy crypto, but you may have to when you sell. If you sell or trade your crypto for a gain, you will have to pay a tax. Let’s say you bought $2,000 worth of crypto and later sold it for $2,200. You’d have to pay taxes on the $200 you made. Conversely, if you lose money on a transaction, you can deduct that from your taxes.

Selling/Spending/Trading

As we covered above, if you buy a certain amount of crypto at a certain price and then sell it for a gain, that is taxable income. Now let’s say you bought $10,000 worth of Bitcoin and you trade it for a boat that would normally cost $20,000. You would now have to pay taxes on that extra $10,000. But if you used that same $10,000 Bitcoin to buy $17,000 worth of another cryptocurrency, you’d have to report $7,000 in gains.

If you’re a crypto enthusiast but need assistance filing your crypto-related taxes, Traders Accounting can help. Our tax professionals can assist you in filing all Bitcoin and cryptocurrency-related taxes. Call 800-938-9513 today for a free consultation.

Day Trader Tax Services

A Tax Guide for Sole Proprietorship Traders

When you make part or all of your income from day trading, you have several different options for categorizing and conducting your enterprise. While business entities such as LLCs and C-Corporations are often the smartest choices as far as tax benefits go, many traders prefer to trade as a sole proprietorship.

Sole traders or proprietorships are popular because they are an easier type of business to establish, you retain full control, and tax preparation is less complicated. If you’re keeping your trading enterprise small and decide not to incorporate, there are a few things you’ll need to know about filing taxes as a sole trader.

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Tax Planning and Preparation Services for Day Traders

How To Qualify for Active Trader Tax Status

One of the great things about trading is that all you have to do to become a trader is get started. Many people trade as a hobby, while others trade full-time to make a living, and then there are some traders who fall somewhere along that spectrum with their activities.

Depending on how much and how often you are trading, you may be able to reap certain benefits when tax time comes around. If you’re a serious, dedicated day trader, then claiming active trader tax status is your best option for maximizing your deductions and minimizing your losses. But how do you qualify for this elite tax category? Let’s take a look.

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Day Trader Tax Services

Five Advantages of Being a Day Trader

The idea of becoming a player in the stock market can be scary and exciting at the same time. Unfortunately, people who are interested in trading or investing are often put off by the risk and uncertainty of the process before they can really experience the potential rewards.

Day trading especially gets a bad rep when the truth is, there are a lot of advantages that make it not just a profitable hobby or profession, but a smart and satisfying one too. Here are some of the biggest perks that make being a day trader worthwhile!

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