TRADER TAX LAW 2018 UPDATE

Transcription

1 11/12/2018 Copyright Green & Company, Inc. TRADER TAX LAW 2018 UPDATE November 13, 2018 TradersEXPO Las Vegas Workshop 1

2 11/12/2018 Copyright Green & Company, Inc. 2 Presenter: Adam Manning, CPA Member

3 11/12/2018 Copyright Green & Company, Inc. 3 Content by: Robert A. Green, CPA Managing Member

4 11/12/2018 Copyright Green & Company, Inc. 4 Adam Manning, CPA explains: Trader tax status (TTS). Tax treatment of securities, Section 1256 contracts, options, ETFs, ETNs, forex, and cryptocurrencies. Tax elections and wash sale loss limitations. TTS entities with health insurance and retirement plan deductions.

5 11/12/2018 Copyright Green & Company, Inc. 5 TRADER TAX STATUS TTS traders get several tax benefits that investors do not.

6 May 19, 2018 Copyright Green & Company, Inc. 6 Trader tax status (TTS) benefits Deduct business expenses and home-office deductions Elect Section 475 on securities for tax loss insurance - exemption from wash sale losses, and the capital loss limitation Eligible for a potential 20% QBI deduction on Section 475 income Deduct health insurance and a retirement plan contribution in a TTS S-Corp

7 11/12/2018 Copyright Green & Company, Inc. 7 Investors are penalized The 2017 Tax Cuts and Jobs Act (TCJA) suspended investment fees and expenses. Investors are stuck with wash sale loss adjustments, and the $3,000 capital loss limitation. They cannot elect Section 475 MTM. An entity must qualify for TTS; otherwise, it s an investment partnership. An investment partnership cannot arrange health insurance and retirement plan deductions for owners.

8 May 19, 2018 Copyright Green & Company, Inc. 8 How to qualify for trader tax status Substantial volume at least four total trades per day, 15 per week, 60 per month, and 720 per year (Poppe court) Frequency a trade execution on 75% of available trading days Continuous with no sporadic lapses Time four hours per day including research & administration. Average holding period under 31 days (Endicott court) Intention to run a business and to make a living Business setup (multiple trading devices and monitors) Materiality (PDT $25,000 for securities; $15,000 otherwise)

9 11/12/2018 Copyright Green & Company, Inc. 9 Business expenses include: Tangible personal property up to $2,500 per item. Section 179 (100%) depreciation. Otherwise, bonus and/or regular depreciation. Amortization of start-up costs (Section 195), organization costs (Section 248), and software. Education expenses paid and courses taken after commencement of TTS. Otherwise, pre-business education may not be deductible or include it in Section 195 start-up costs.

10 11/12/2018 Copyright Green & Company, Inc. 10 Business expenses include: Publications, market data, professional services, chat rooms, mentors, coaches, supplies, phone, travel, seminars, conferences, assistants, and consultants. Home-office expenses for the business portion of your home. Margin interest expenses. Stock borrow fees for short sellers. Internal-use software for self-created automated trading systems.

11 11/12/2018 Copyright Green & Company, Inc. 11 SECURITIES Securities traders need to watch out for higher tax rates, wash sales, capital-loss limitations and accounting challenges.

12 11/12/2018 Copyright Green & Company, Inc. 12 Securities include: - equities (stocks) - equity (stock) options - narrow-based indexes (an index made up of nine or fewer securities) - options on narrow-based indexes - ETFs structured as registered investment companies (RIC) - options on securities ETFs structured as RIC - ETNs structured as debt instruments - bonds - mutual funds - single-stock futures

13 11/12/2018 Copyright Green & Company, Inc. 13 Short-term vs. long-term capital gains With the default realization (cash) method, report realized gains and losses on securities for the tax year. Defer unrealized gains (or losses) on open securities positions at year-end. Short-term capital gains rates are the ordinary tax rates, currently up to 37% for 2018 and Long-term capital gains rates up to 20% for 2018 and 2019 apply to sales of securities held for 12 months or longer.

14 11/12/2018 Copyright Green & Company, Inc. 14 Wash sale loss adjustments At year-end, many taxpayers do tax loss selling of securities in December. The IRS wash sale (WS) rules defer the loss if the taxpayer re-purchases a substantially identical securities position within 30 days before or after, which means into January of the subsequent year. Learn how to avoid wash sales here:

15 11/12/2018 Copyright Green & Company, Inc. 15 Section 475 election TTS traders choose Section 475 on securities for tax loss insurance, exemption from wash-sale rules and the $3,000 capital loss limitation. And, to potentially be eligible for a 20% QBI deduction, if under the income cap for a service business. Existing individual taxpayers had to make a 2018 Section 475 by April 17, 2018 (March 15 for existing S-Corps and partnerships). If you missed the 2018 election deadline, then consider the election for 2019 by April 15 (March 15 for existing S-Corps and partnerships).

16 11/12/2018 Copyright Green & Company, Inc. 16 SECTION 1256 CONTRACTS Section 1256 contract traders enjoy lower 60/40 tax rates, summary tax reporting, and mark-to-market accounting.

17 11/12/2018 Copyright Green & Company, Inc. 17 Section 1256 contracts include: - U.S. futures (regulated futures contracts) - options on futures - foreign futures with CFTC and IRS approval - broad-based indexes (a broad-based index is one that is made up of 10 or more securities) - options on broad-based indexes - forward forex contracts with the opt-out election into Section 1256g on the main currencies, for which futures trade (we make a case for spot forex too) - options on commodities/futures ETFs structured as publicly traded partnerships (PTP) - CBOE-listed options on volatility ETNs, whether structured as prepaid forward contracts or as debt instruments - non-equity options - forex OTC options (Wright court)

18 11/12/2018 Copyright Green & Company, Inc. 18 Section 1256 contracts bring meaningful tax savings These contracts have lower 60/40 tax rates, meaning 60% (including day trades) are taxed at the lower longterm capital gains rate, and 40% are taxed at the shortterm rate, which is the ordinary tax rate. At the maximum tax bracket for 2018 and 2019, the blended 60/40 rate is 26.8% 10.2% lower than the highest ordinary rate of 37%. There are significant tax savings throughout the income brackets.

19 11/12/2018 Copyright Green & Company, Inc. 19 Section 1256 loss carryback election On Form 6781, you can select the Section 1256 loss carryback election. Rather than use the loss in the current tax year, deduct it on amended tax return filings, against Section 1256 gains only. It s a three-year carryback and unused amounts are then carried forward.

20 11/12/2018 Copyright Green & Company, Inc. 20 OPTIONS Tax treatment for options is diverse, including simple and complex trades on securities vs. Section 1256 contracts.

21 11/12/2018 Copyright Green & Company, Inc. 21 Equity options are securities, and they include: - equity (stock) options - options on narrow-based indexes - options on securities ETFs organized as registered investment companies (RIC)

22 11/12/2018 Copyright Green & Company, Inc. 22 Non-equity options are Section 1256 contracts, and they include: - options on futures - options on broad-based indexes - options on commodity ETFs organized as publicly traded partnerships (PTP) - CBOE-listed options on volatility ETNs, whether structured as prepaid forward contracts, or as debt instruments - forex OTC options

23 11/12/2018 Copyright Green & Company, Inc. 23 Option tax treatment Three things can happen with outright option trades: - Trade option (closing transaction). - Option expires (lapses). - Exercise the option. There are special rules for the holding period for longterm capital gains. For more in-depth information on options tax treatment, see

24 11/12/2018 Copyright Green & Company, Inc. 24 EXCHANGE-TRADED FUNDS (ETFS) Securities, commodities and precious metals ETFs use different structures and tax treatment varies.

25 11/12/2018 Copyright Green & Company, Inc. 25 Securities ETFs Securities ETFs are registered investment companies (RICs). Selling a Securities ETF is deemed a sale of a security, calling for short-term and long-term capital gains tax treatment on the realization method.

26 11/12/2018 Copyright Green & Company, Inc. 26 Commodities ETFs Commodities/Futures ETFs use the publicly traded partnership (PTP) structure. They issue annual Schedule K-1s passing through Section 1256 tax treatment on Section 1256 transactions to investors, as well as other taxable items. Selling a commodity ETF is deemed a sale of a security, calling for short-term and long-term capital gains tax treatment using the realization method.

27 11/12/2018 Copyright Green & Company, Inc. 27 Adjust cost basis on commodities ETFs Taxpayers invested in commodities/futures ETFs should adjust cost-basis on Form 8949 (capital gains and losses), ensuring they don t double count Schedule K-1 pass through income or loss. Form 1099-B and trade accounting software does not make this adjustment, so you need to make a manual adjustment.

28 11/12/2018 Copyright Green & Company, Inc. 28 FOREX Get the best of both worlds with forex taxes: Ordinary losses in Section 988 or elect capital gains for a chance to use lower 60/40 rates in Section 1256(g)

29 11/12/2018 Copyright Green & Company, Inc. 29 Forex trading Forex transactions start off receiving an ordinary gain or loss treatment, as dictated by Section 988 (foreign currency transactions). Section 988 allows investors and traders to internally file a contemporaneous capital gains election to opt-out of Section 988 into a capital gain or loss treatment. Make, or retract, that election on a "good to cancel" basis at any time during the year. If you have a capital loss carryover, then consider a capital gains election.

30 11/12/2018 Copyright Green & Company, Inc. 30 Section 1256(g) The capital gains election on forex forwards allows the trader to use Section 1256(g) treatment with lower 60/40 capital gains rates on "major" currencies if the trader doesn t take or make delivery of the money. Major currencies means currency pairs, which also trade as futures on U.S. futures exchanges. We make a case for including "spot" forex in Section 1256(g). (See

31 11/12/2018 Copyright Green & Company, Inc. 31 OTHER FINANCIAL INSTRUMENTS Foreign futures, precious metals, and volatility products including exchange traded notes (ETNs).

32 11/12/2018 Copyright Green & Company, Inc. 32 Foreign futures By default, futures contracts listed on exchanges located outside of the U.S. are not Section 1256 contracts. If the foreign-futures exchange wants Section 1256 tax breaks, they must receive an IRS Revenue Ruling. Only a handful of exchanges have Section 1256 treatment. (See a list, which includes Eurex, LIFFE, ICE Futures Europe, and ICE Futures Canada. )

33 11/12/2018 Copyright Green & Company, Inc. 33 Precious metals Physical precious metals are collectibles which are a particular class of capital assets. If you hold collectibles over one year (long-term), sales are taxed at the collectibles tax rate the taxpayer s ordinary rate capped at 28%. If you hold collectibles one year or less, the short-term capital gains ordinary tax rate applies no different from the regular STCG tax rate.

34 11/12/2018 Copyright Green & Company, Inc. 34 Volatility products There are many different types of volatility-based financial products to trade, and tax treatment varies. For example, the CBOE Volatility Index (VIX) futures are Section 1256 contracts with lower 60/40 MTM tax rates. The NYSE-traded SVXY is an exchange-traded fund (ETF), taxed as a security. The ipath S&P 500 VIX Short-Term Futures (VXX) is an exchange-traded note (ETN) prepaid forward contract, and while tax treatment is similar to an ETF, there are some differences.

35 11/12/2018 Copyright Green & Company, Inc. 35 Volatility ETNs: Prepaid forward contracts vs. debt instruments Many issuers structure volatility ETNs as prepaid forward contracts, which provides a deferral of taxes until sale (realization). Long-term capital gains rates apply if held 12 months or longer. (i.e., VXX) Prepaid forward contracts are not securities, which means they are not subject to wash sale loss adjustments and Section 475 if elected by traders eligible for trader tax status. Some ETNs, like UGAZ, are debt instruments taxed as securities, which means they are subject to wash sale losses and Section 475, if elected.

36 11/12/2018 Copyright Green & Company, Inc. 36 CRYPTOCURRENCIES Selling, exchanging or using cryptocurrency triggers capital gains and losses for traders and investors.

37 11/12/2018 Copyright Green & Company, Inc. 37 Capital gains and losses The IRS treats cryptocurrencies as intangible property; not a security or a commodity. The realization method applies with short-term vs. longterm capital gains and losses. If you invested in cryptocurrencies and sold, exchanged, or spent some during the year, you have to report a capital gain or loss on each transaction. Include crypto-to-currency sales, crypto-to-crypto trades, and purchases of goods or services using crypto.

38 11/12/2018 Copyright Green & Company, Inc. 38 Crypto accounting and reporting U.S. crypto exchanges issued a 2017 Form 1099-K to accounts with transactions over a threshold. The problem for the IRS is that many crypto transactions on exchanges around the world are not evident for tax reporting. Crypto investors should download all crypto transactions into a crypto accounting program that is IRS-compliant. The new tax law does not allow Section 1031 like-kind exchanges for crypto-to-crypto trades, starting in 2018.

39 11/12/2018 Copyright Green & Company, Inc. 39 PASS-THROUGH ENTITIES

40 11/12/2018 Copyright Green & Company, Inc. 40 Sole proprietorship (unincorporated business) Many active traders ramp up into qualification for TTS. They wind up filing an individual Schedule C (Profit or Loss from Business) as a sole proprietor business trader the first year. Deduct trading business expenses on Schedule C and report trading gains and losses on other tax forms. Consider filing a 2019 Section 475 MTM election on securities only by April 15, 2019, to use ordinary gain or loss treatment. A Schedule C trader cannot arrange health insurance and retirement plan deductions in connection with trading income.

41 11/12/2018 Copyright Green & Company, Inc. 41 Limited Liability Company The default tax treatment for a spousal-member Limited Liability Company (LLC) is a partnership tax return. A single-member LLC (SMLLC) is a disregarded entity, a tax nothing in the eyes of the IRS. That means a SMLLC with TTS is back to filing a Schedule C. A multi-member LLC and a SMLLC may elect S-Corp tax treatment within 75 days of inception, or by March 15 of the current tax year for existing entities.

42 11/12/2018 Copyright Green & Company, Inc. 42 S-Corp election Traders with TTS should consider an S-Corp election if they want deductions for health insurance and retirement plans. LLCs and corporations may elect S-Corp status. A 2019 S-Corp election (Form 2553) is due by March 15, 2019, or within 75-days of the inception of a new entity. The TTS S-Corp pays officer compensation, which unlocks the health insurance and retirement plan deductions.

43 11/12/2018 Copyright Green & Company, Inc. 43 Solo 401(k) retirement plan It combines a 100% deductible elective deferral of $18,500 for 2018 and $19,000 for 2019 with a 25% deductible profit-sharing plan contribution. There is also a catch-up provision of $6,000 for 2018 and 2019 for taxpayers age 50 and over. Together, the maximum tax-deductible contribution limit for a defined contribution plan is $61,000 for 2018 and $62,000 for 2019 including the catch-up provision.

44 11/12/2018 Copyright Green & Company, Inc. 44 QUESTIONS AND ANSWERS

45 November 12, 2018 Copyright Green & Company, Inc. 45 Closing Remarks Thank you for attending this TELV198 Workshop. Visit for additional information. Call us toll free at or Chat with us. us your questions at info@greentradertax.com

46 11/12/2018 Copyright Green & Company, Inc. 46