The tax rules for stock investors in general requires three steps. Step one is the netting of short-term capital gains and short-term capital losses. Step two is the netting of long-term capital gains and long-term capital losses. Step three is the netting of net short term gains/losses and net long-term gains/losses. Any capital losses in excess of $3,000 are carried forward indefinitely to offset future capital gains plus $3,000 of ordinary income every year, until the capital losses are used up. But what if you are a "day trader"? What special tax rules exist for day traders? This article will address those unique tax rules that apply to day traders.

What is a day trader? In general, a day trader, is anyone who engages in the business of trading stock. You are in the business of trading stock, and thus not an ordinary stock investor, when the frequency of your trading activity is such that it meets the "material participation" test. Qualifying as a trader under this material participation test is difficult because one must be active in the securities markets on a daily basis and attempt to profit from short-term swings in security prices. Many online investors fail this test, but some day traders (most of whom are also online investors) meet the standard. In Purvis [37 AFTR2d 76-968, 530 F2d 1332 (1976, CA-9)], the Ninth Circuit Court of Appeals upheld a prior tax court decision [Purvis, TC Memo 1974-164 (1974)] and agreed with the Tax Court that in order to be classified as trading, the activity should be performed with sufficient frequency to "catch the swings in the daily market movements and profit thereby on a short-term basis." Day traders can take a buy-and-hold approach, but most of them seek to take advantage of short-term market fluctuations and this short-term market fluctuation criteria is the linchpin in qualifying some day traders as traders rather than investors for federal income tax purposes.

What's so important about being considered a trader verses an investor?
Investor losses in excess of $3,000 a year are not deductible in the year of the loss. This excess loss amount must be carried forward. There is no time limit on the future utilization of the excess losses, but if you continue to rack up losses each year, you will be limited, each year, to this $3,000 loss limitation. Traders, on the other hand, are not limited to this $3,000 annual loss limitation. They are able to deduct their entire net loss for the year on their individual income tax return. Traders report their net gains/losses on Form 4797 as ordinary income (investors report their net gains/losses on Schedule D. Net long-term capital gains are taxed at the favorable long-term capital gains tax rates (currently 15%). Traders are also eligible for certain deductions that are not available to investors. One such deduction is the home office deduction. Traders may use their net income from trading activities to fund a SEP-IRA, and thus further reduce their taxable income. Another such deduction available only to traders is interest expense. Investors are limited to deducting interest expense incurred on debt used to finance their investment activities to investment income (gains, dividends and interest income). This limit on deducting interest expense to the extent of investment income, is not applicable to traders. Traders may deduct their interest expense as a deduction on Schedule C. Lastly, wash sale rules, which apply to investors, do not apply to traders. The wash sale rules require the deferral of trading losses, where the investor acquires substantially identical stock or securities within thirty days before or after a sale generating a loss.

So how do you make the leap once you have determined that you are in the business of trading?
Traders who desire to be treated at in the business of trading stocks make an election called the Mark-To-Market election by April 15th of the current year. To be treated as a trader for 2010, a trader must make this election by April 15th, 2010, which is attached to either their 2009 Form 1040 or attached to their 2009 extension.
Election language:
Taxpayer hereby elects under IRC Sec. 475(f) to use the mark-to-market method of accounting for securities. This election will first be effective for the tax year ended December 31, 2010. The election is made for the following trades (list trades).

Once this election is made it is effective for all future tax years. The mark-to-market election requires traders to mark their stock holdings to market value at the end of the tax year. Once made, all security gains and losses are treated as ordinary income or losses and all trading securities on hand at the end of the year are deemed to be sold (and repurchased) at the year-end market value. All unrealized (unsold securities) gains and losses recognized under the mark-to-market election increase (unrealized losses) or decrease (unrealized gains) their basis in a given security.

Because making the mark-to-market election can have significant tax ramifications to future trading activities you should first consult with your CPA to determine if your trading activities meet the material participation test and, if so, if this election makes the most sense to your future trading business.

        

One of the frequent questions I am asked by my clients is whether or not they can use their IRA money to purchase real estate. The answer is always yes, but with a big pause. The reason? Owning real estate inside your IRA is potentially a recipe for disaster. The rules are so restrictive that it is easy to trip up over one of those rules and find yourself saddled with income taxes and penalties that ravage your IRA and render it useless for retirement. Still, there are many success stories out there and doing it correctly can ... << MORE >>

OPPORTUNITIES ARE FUELED BY PASSION

Passion is the fuel for uncovering opportunities. Without passion for what you do it is very difficult to see the opportunities that are right before your eyes. Passion energizes your thinking. It opens up your eyes to opportunities. It helps you focus on looking for the solutions to the obstacles that are in your way. You can’t teach passion. It is an intangible that is a prerequisite ...

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How would you like to simultaneously provide for your retirement and and receive a large charitable tax deduction? How would you like to simultaneously provide for your children and receive a large charitable tax deduction?  In the universe of charitable planning there are two tax advantaged vehicles that will allow you to accomplish these two worlthwhile objectives. They are charitable trusts known as a Charitable Remainder Trust (CRT) and a Charitable Lead Trust (CLT).

Creating Retirement Income Through a CRT:
A CRT can provide you with an annual retirement stream of income for life. When you die the assets remaining in the CRT are transferred to a qualified charity of your choosing. Two types of CRTs are typically used to accomplish this. The Charitable Remainder Annuity Trust (CRAT) and the Charitable Remainder Unity Trust (CRUT).  A CRAT pays a fixed amount each year to you for retirement while a CRUT pays a fixed percentage of the trust assets each year to you.  In order to accomplish these objectives the IRS requires you to follow certain rules.
CRT Rule #1: The annual annuity you receive each year must be at least 5% (but no more than 50%) of the trust assets.
CRT Rule#2:  The terms of the trust cannot exceed the lessor of 20 years of the grantor's (you) life expectancy.
A CRT is organized as a tax exempt trust. It is not subject to income tax. When you donate assets to the trust you receive a current year charitable tax deduction equal to the actuarial value of the remainder interest. Once the assets are inside the CRT they may be sold without any of the gain being subject to tax. The only tax you pay is on the retirement distributions you receive each year from the CRT. 

Providing For Your Children Through a CLT:
A CLT creates an annual annuity stream that is paid to a qualified charity of your choosing for a fixed term. Any assets remaining after the expiration of this term are distributed to you children or heirs. Unlike a CRT, a CLT is not a tax exempt trust. This means that all income earned by the CLT is taxable to the Grantor (you) each year. The benefits of a CLT include a current year charitable contribution deduction, a reduction in your estate tax and appreciation of trusts assets outside your estate. Your children will receive what is left in the CLT which can then be used to meet their future living needs. Like a CRT, a CLT comes in two flavors: a Charitable Lead Annuity Trust (CLAT) and a Charitable Lead Unit Trust (CLUT). A CLAT pays a fixed amount each year to your charity while a CLUT pays a fixed percentage of the trust assets each year to your charity. 

If you think you may be a candidate for charitable planning please reach out to a CPA and/or an Estate attormey who specializes in Estate planning.

        

The Internal Revenue Service (IRS) has historically required that gambling winnings and gambling losses be separately accounted for. The reason for this has to do with the way gambling losses are deducted for tax purposes. Gambling losses are treated as an itemized deduction and reported on Schedule A of the individual income tax return (Form 1040). This creates a problem in the cases in which taxpayers cannot itemize (as is the case when a standard deduction is greater) or in which the taxpayer's income exceeds a certain threshold (in which case the taxpayer loses part of their itemized ... << MORE >>

Unfortunately, the majority of individuals dislike or are bored with their job.  Most have little, if any, passion for what they do for a living. As we grow older the idea that life is passing us by without anything to show for it begins to take root. Some react in strange ways and it may be brushed aside as a "mid-life crisis". The fact is when we come to the realization, at some point in our lives, that we are running out of time, we react by engaging in activities that are outside our normal behavior. Unfortunately, too often, this behavior is bad or destructive. There is a feeling of powerlessness; stuck on a treadmill from which you can't seem to get off. The intent of this article is to help such individuals find a constructive way off the treadmill, without harming the ones you love most, your direct family. My objective is to give you hope and direction in exiting your personal treadmill and finding your passion in life for income producing activities. Help is on its way. So let's begin.

How do you "Find Your Passion" and change your life? There are four steps:
#1 - Exploration
Take up a new hobby/activity. Engage in this new activity for three months. At the end of three months take up another new hobby/activity for another three months. Do this for one year. That will be four new hobbies/activities. Be careful to select only those activities that have the potential to generate income in the long-term. 

#2 - Identification
After experimenting with your four new hobbies you will be able to identify at least two hobbies which really fueled your passion. How? You will know your passion has been released for an activity when you become fanatical or obsessed with that activity. When you can't wait to engage in the activity and, when engaged, you don't want to stop the activity. Then and only then will you have found your passion.

#3 - Engagement/Perfection
At this stage you have decided to focus all of your available free time to regularly engage in this activity; each day learning more and improving your skills in the activity. It takes about seven years to perfect your skills in any one area or activity. That seven years makes you an expert or a professional.

#4 - Career Change - Making the Move
At this point you are now equipped to take the leap into your new career. This move can be made on a full-time of part-time basis. Part-time minimizes the risk of stumbling and making mistakes (which will happen) as you have your existing full-time job to fall back on. Part-time also takes longer to build a business base. Building a customer base or book of business takes time. It may take five to seven years to build a book of business that is self-sustaining (i.e. profitable enough to make a living). If you engage in the activity full-time you may be able to cut this period in half. 

Too many of us fail to experiment with new and different things. We rationalize that we simply do not have the time. An interesting thing occurs, however, when you find an activity which fuels a passion. You somehow find the time. You make sacrifices. Less T.V., less socializing, less tennis, golf or softball. The key variable in all this is passion. When you find your passion, you make room for the activity in your life. Passion is the key to changing your life and getting you off the treadmill that enslaves so many.  

        

What's the difference between $100,000 in royalties received by by an author on:
1. Your one and only book or
2. Your third book in three years?

About $15,300 in additional tax, if you are in the second category. You see, as a general rule, all royalties received for writing are subject to what is called "self-employment tax". The only exception to this is when an individual in not regularly engaged in writing activities. Regularly means more than once, generally. A court case (Langford, TC Memo 1988-300) held that a ... << MORE >>

Uncle Sam wants to tax your income, no matter where you earn it. As a general rule, all income received by a U.S. citizen or resident is subject to U.S. income tax, no matter where it is earned. Further, as long as you are considered a U.S. citizen or resident, you are forever required to file a U.S. income tax return. Forever. But like most pieces of tax legislation, there are exceptions. The exceptions to this general rule allow such individuals to exclude a portion of their world-wide income earned outside the U.S. The two exceptions available are ... << MORE >>

Business mistakes, upon reflection, stand out like missing teeth in a smile. They are so obvious after the fact. You wonder how you could have ever been so dumb. But making mistakes is part of being a successful business. In fact, every successful business is a mouth full of missing teeth. These mistakes offer a learning experience that can never be reproduced in a classroom. Mistakes are the real-life business MBA. Business mistakes cost you money. They cost you customers and clients. Because of this, mistakes become imprinted on your brain. They are scar tissue on the brain. ... << MORE >>

In my five-year study of the daily success habits of wealthy individuals ("Rich Habits": www.richhabits.net) one important discovery I made was that wealthy individuals are fanatics when it comes to daily career related self-improvement. I uncovered four ways that wealthy individuals engage in such self-improvement: Reading, Writing, Speaking and Doing. Each one gets you higher up the ladder of financial success.

Reading - Many of us get those monthly industry periodicals. Typically, we set them aside and tell ourselves that we will get ... << MORE >>