For those who want to begin trading, it is important to refrain from just jumping right into it without taking the proper steps first. Traders have to set themselves up for success, and this starts before they create an account, before they deposit their funds and long before they choose their first trade. Doing the little things right at the beginning can help for years to come.

New trader
Eliminate All Debt
Before trading, individuals should eliminate all personal debt. Trading is something that should only be done with money that the trader can afford to lose. Until this debt, such as student loans or credit card debt, is gone, the risk is just far too great. Traders should take their time to eliminate debt, even if it takes several months. This way, if trades go against them, they can regroup and try again, rather than face a potentially serious financial problem.

Traders Must be Well Capitalized
Trading is not something that should be done without appropriate capital. Serious traders need enough so that they can invest and make good returns on even small movements. Traders also need enough security capital in case they experience losses.

Choose or Develop a Trading System

It is important to have a logical trading system. Successful traders do not just trade on hunches. Hunches are only going to pan out every so often, and professionals need something more consistent that’s based on facts and market trends. Individuals who know enough about trading can develop a personalized system, but it is often better to start by researching systems or patterns that other traders use. One can then tweak these systems so that they work more effectively. A system is never done being edited and altered. As traders learn, they can make the necessary adjustments.

Manage the Risks
Traders must follow strict money management rules. They cannot put in too much, risking far more than they want just to gain their money back. Most people make this mistake when they have missed some trades and they’re getting behind. They’re tempted to pour a lot into one final, huge trade, hoping that it goes their way so that they can get even again. The problem is that this is emotional trading, not smart trading. It’s important to establish rules about how much can be risked. Traders may have some rough patches, but establishing stop losses will allow them to stay afloat and be successful.

This week we’ll conclude our series with the worst trader tax filing mistakes of them all. If you’re just joining us, you might want to go back and review Part I and Part II .

top 3 tax mistakes

3.     Not filing with the Mark-to-Market (MTM) accounting method

Failure to make the section 475 MTM election on securities means you can deduct a maximum of $3,000 in trading losses because that is the maximum capital gains loss that can be claimed in one year. We’ve met literally hundreds of traders who got stuck with capital loss carry forwards, either because they were not aware of the MTM election or because they missed the deadline to make the election. Unfortunately, you can’t fix a missed or botched Section 475 election. Your only recourse is to form a new entity and use the “new taxpayer” exception allowing an internal Section 475 election within 75 days of inception.

If you’re a consistently profitable trader, you may not be interested in the tax loss insurance that MTM provides—but you’re probably interested in being exempt from the burdensome wash sale loss deferrals rules that apply to non-MTM traders. For example, you may be profitable for the year, but have hundreds of wash sale transactions during the year. You would not be able to include those in your profit/loss calculation, thus increasing your tax liability substantially. Reporting wash sales is time consuming and may increase your tax filling costs significantly. In most cases you can’t rely on your brokers to issue a 1099 that would accurately reflect your wash sales and you will need the assistance of a trader tax expert.

There are many nuances to electing MTM and strategies to consider. The election is not automatic to all and the decision to make the election is individually based and must be made only after consulting with a trader tax specialist.

2.     Not claiming trader tax status—or claiming it when you are not entitled to it  

Business traders can save on average $5,000 or more using business expense treatment. That’s because business expenses are 100% deductible from gross income, whereas investment expenses are considered miscellaneous itemized deductions and are only deductible “below the line” and in excess of 2% of your adjusted gross income (AGI). Investment expenses are also added back for the Alternative Minimum Tax (AMT) calculation, which can eliminate the tax reduction originally generated by these expenses. In addition, filing as a business allows traders to claim home-office deductions, education expenses and startup costs, whereas investment expenses do not. Quite simply, missing out on trader status can cost you thousands of dollars in unnecessary taxes.

On the flip side, many traders are eager to write off their trading expenses that may be as high as $50,000 in their first year. They either file on their own or pressure their accountants to claim these expenses.  They are putting themselves at risk.  If they are not able to substantiate their position as a business trader, they will have to pay substantial penalties to the IRS.

1.     Failing to have a clear tax strategy

Benjamin Franklin once said that, “By failing to prepare, you are preparing to fail.” We’ll wrap by sharing a real story that demonstrates many of the mistakes discussed in this series.

Mr. A from Southern California, attended a seminar by an accounting firm that claims it specializes in trader taxation. The firm offered him a simple “one size fits all” solution for a “small fee” of $4,500. He decided to pass –but then he adopted the firm’s recommendation and structured his own entity. That was his first mistake. He then attempted to get professional accounting advice and interviewed four different firms. He decided they couldn’t help him, so he filed his own return using TurboTax. That was mistake #2, especially because he made a number of errors on the return and was audited by the IRS.

Since Mr. A likes a do-it-yourself approach he decided to be his own representative at the IRS—mistake #3. The IRS asked him to pay more than $76,000 in taxes and penalties. At this point Mr. A attended our Core Tax Strategies class and asked OTA Tax Pros to represent him. Our analysis found that he was actually vulnerable for an even higher tax liability than the IRS had requested. However, with careful strategic planning we were able to bring his liability down to about $36,000—more than $40,000 in tax savings! What’s the moral of this story? Let the tax experts do their job!

When you need a diagnostic on your medical condition you would seek your doctor’s advice. You might research your symptoms on the internet, but when it comes to picking the right medicine or medical procedure you would have the good sense to consult a professional. Although trader taxation may not be a matter of life and death, you still should seek the same expert advice.

You need an action plan to achieve your goal, and an expert to guide you through the process. Our role is to reduce your tax liability, save you money, help you build your wealth faster by paying less taxes and keep you out of trouble with the IRS. Your responsibility is simple: seek expert advice and execute on it.

To find out more about how you can avoid audits, reduce taxes legally and keep more of your profits, please visit OTA Tax Pros

Last week we began exploring the top ten mistakes traders make when filing their taxes. Working up the list from least to worst, let’s consider with numbers 6-4:

Tax mistakes part 2

6.      Using TurboTax® to prepare your taxes as a trader

In recent years TurboTax has become increasingly popular as a way of preparing tax returns. TurboTax can be a good solution for straightforward returns, but when you are attempting to prepare a more complex return that requires unique tax knowledge, do-it-yourself software may not be the best fit.

TurboTax relies on you to provide all the necessary information to prepare an accurate return and the software makes certain assumptions in determining the right treatment. The problem is, there is no tax code that defines who can qualify as a trader in securities. To determine if you qualify you need tax court knowledge and experience in the field of trader taxation. You need to know whether to make the mark-to-market election, how each investment asset is taxed, what deductions are available to you and which deductions are not, and which filling status you can qualify for. Correct determinations in these matters can make a huge difference on your tax liability.

In a Bloomberg interview on Feb 12, 2012, a CPA working for TurboTax said the following about his role in answering questions to the public: “I was getting questions from folks out in Idaho who had a farm and wanted to know about farm income. I’m in New York here. Ask me about stocks, not farms. The interesting thing is I had to answer their question so I had to learn about that on the fly and that’s what a lot of our agents have to do.” You probably don’t want to rely on advice that is learned “on the fly.” In trader taxation you need an experienced firm that specializes in trader taxation, such as OTA Tax Pros.

 5.      Representing yourself in front of the IRS

If the IRS contacts you and “invites” you to an examination, you should always seek professional representation—especially if you are claiming Trader in Securities status or writing off losses in excess of $3,000. You are at a major disadvantage when representing yourself, and the IRS is well aware of this fact. You are involved emotionally and may make statements that will help the IRS extract even more dollars from you. The IRS expects that a qualified representative will know more about the IRS procedures and the IRS Code than the taxpayer. They are less likely to use scare tactics against your representative.

Advocating takes experience. Just as you would not go to court without an attorney, you should not go to an IRS audit without a qualified representative who knows exactly which areas of your tax return can generate a refund or reduce the impact of lost deductions. Winning takes strategy and proper timing. Your case must be presented in the most favorable position and in a manner that will close the audit as quickly as possible. In addition, it is more cost effective to get a tax trader specialist like OTA Tax Pros involved in the beginning than to seek costly interventions, such as Appeals or Tax Court, in the future.

4.       Not forming a business entity or forming the wrong one“One size fits all”

Some accounting firms take the position that anyone can qualify for Trader in Securities status and write off all their trading expenses and all their trading losses. What’s their strategy? Set up an LLC or corporation to trade through, and you’ll automatically qualify as a Trader in Securities. This strategy is appealing as it promises an easy pass into writing off all your trading related expenses—but it simply does not work and will fail in an IRS audit.

An even worse mistake may be not forming an entity at all, causing the trader to lose substantial tax benefits such as deductible medical premiums, retirement contributions and start-up costs. In addition, a trader reporting as an individual, vs. a business entity, may have increased risk of being selected for an IRS examination.

If you want a strategy that works for you, you need to work closely with a specialist in taxation as it relates to trading. At OTA Tax Pros, for example, at the beginning of a relationship with a new client we take the time to learn about their current tax status, their past tax fillings and their trading goals. We then recommend a tax plan based on each client’s unique factors, providing the best opportunity to reduce tax liability and stay in compliance with IRS rules and rulings. For some traders the best entity for trading may be the Limited Liability Company or LLC, but for others this may prove a terrible choice. As an example, a trader who lives in California and sets up an LLC may be subject up to $12,000 in Annual Limited Liability Company tax. Had this trader set up a partnership or corporation they would avoid that $12,000 tax bill. Examples like this apply to other states as well. Each state has its own set of unique tax rules that may affect your choice of a business entity.

Next week we will review the final three (and the worst) mistakes traders make when filing their taxes. Until then, have a successful week.

To find out more about how you can avoid audits, reduce taxes legally and keep more of your profits, please visit OTA Tax Pros

What a difference a month makes! February started off with great motivation after January’s trading results. The first week of February had some great results, high winning percentage and winners much greater than losses. Then the slide hit. I went on a very bad streak, even by my standards. Over a 3 week period, I had 4 winning trades and 21 losing trades, very uncharacteristic for me. At one point, it was so bad that I hit one of my self-imposed “Circuit Breakers” that I wrote into my trading plan. That rule is: if I 3 losing days in a row, I have to take 2 days off from trading. This is a rule that I have had for several years to help break up a bad streak. And trust me; you will all have a bad streak! Not only did this happen once in February, but it happened twice. Needless to say, that sequence of events had me a bit flustered, but I was ok with it as I followed my rules and was just out of synch with the markets. More importantly, I was still leading the competition!
Then my Black Swan hit.

On the evening of February 27th, I was laying in bed reading a Jack Reacher book on my Nook with my iPhone sitting next to me showing me the 5 minute chart of the euro. I saw it approaching a supply level that would be good for a short term trade. I put the book down and opened a large position on EURUSD and went back to reading. I knew where my stop loss was, but did not place it in the system as I do not trust FX brokers. I have seen them run stops before, and I was actively watching the trade. Normally, if I’m sitting there watching the screen, I use manual stops and only use computerized stops when I cannot actively watch the trade. The trade started moving in my favor and I recall the P&L around $500. I continued reading my book occasionally glancing over and managing the trade until about 1:20am PST, when I fell asleep.
I woke up and quickly realized that I had NOT planned on falling asleep, and therefore NOT put a physical stop on the trade. I grabbed my iPhone in panic, pulled up the platform and began sweating immediately! The Euro had rallied over 100 PIPs in under an hour! Turning my small winner into a massive loss! A loss so big, that it drained nearly 30% of my account.

Now this account is in the red for the year, and more importantly, I’m no longer on the leader board! As I said too many followers on Facebook, there is still a LONG way to go for this contest, and I’m confident that by December 31st, I will be the top spot on the Forex competition. Just have to deal with this slight detour! Hope to see you back on the leader board by next month! Happy Trading!

The US tax code is a complex maze. It is 73,954 pages long and includes more than 1,999 different publications and tax forms. In order to win in the tax game, you need to have the proper knowledge and expertise that can help you reduce your tax liability and stay in compliance.

In this 3 part series, we are going to zoom in and focus on trader taxation laws and the top ten mistakes traders make when preparing their tax returns. These mistakes lead to IRS audits, penalties and fines. These mistakes are costly and may cause you to pay thousands of dollars in unnecessary taxes.

Top Ten Mistakes Traders Make When Filing Their Taxes

Let’s count backwards from least to worst:

10.      Not filing a tax return due to trading losses or minimal trading

There are people who are under the impression that they are required to file a tax return only if they had trading profits. Or, they are exempt from filing a tax return if they had a handful of trades, or experienced losses in the market. They are absolutely wrong! Failure to report your trading activity, even if you only had losses, or minimal gains may lead to IRS notices, penalties and interest. Take note that the IRS receives a copy of your 1099 from your brokerage company and if there is not a match between the trades on the 1099 form to the trades reported on your tax return they will send you a notice. What is worse is that the IRS will assume that your total taxable profits equal your total proceeds, and you will be taxed at the highest tax bracket allowable. In the last 13 years, I have seen many IRS notices like this, asking taxpayers to pay up to hundreds of thousands of dollars in taxes. The clients typically are astonished when they receive these alarming notices.  The issue is usually resolved by doing one simple action –  filing a tax return.

9.      Reporting your gains and losses on Schedule C:

Unfortunately, some traders experience losses that are greater than $3,000. In attempt to fully write off their losses they report it on Schedule C. They claim that they are business traders and therefore they are allowed to report their losses on Schedule C. This is a sure way to get on the IRS radar. The IRS code and publications clearly states that all capital transactions must be reported on Schedule D. Therefore, you are limited to claiming $3,000 of your losses in the year they occurred. The remainder of the disallowed losses gets carried over to future years. The only way to claim losses in excess of $3,000 is by electing the MTM accounting method which must be made by April 15th of the tax year in question. Most traders are not aware of this election and fail to make it on time. Reporting losses on your Schedule C will most likely generate an IRS notice or examination. The result of this notice will surely be additional tax liability, penalties and interest. Avoid this mistake and consult with your trader tax professional on strategies you can use.

8.      Paying self-employment (SE) taxes on trading

Many traders elect to trade via a business entity such as a corporation, partnership or LLC. When doing so they report all of their trading income as ordinary income and they subject their trading income to self employment tax. You should know that trading income is not considered to be earned income and only earned income is subject to self-employment tax. Therefore, reporting your gains as earned income subjects you to an additional 15.3% of unnecessary taxes. Let’s assume that Joe trader made $100,000 and reported all income as subject to self employment tax, this would mean that Joe would pay $15,300 in self employment tax. Only full members of futures exchanges are obligated to pay SE taxes on futures trading gains. However, too many traders out there are paying SE taxes on these gains. If you think the IRS will correct this error for you, you are simply wrong. The IRS hardly ever corrects mistakes in their favor.

7.      Mixing up the tax treatment between securities, 1256 contracts, forex and options.

Stocks, bonds, and mutual funds belong to the securities group and are taxed at the long term capital gain rate if held more than a year. If the position is held for less than a year it is taxed at the short-term capital gain rate. Which essentially is your ordinary income tax bracket. Securities are also subject to the wash sale rule unless you have elected MTM accounting. Futures contracts are part of Section 1256 contracts which are entitled to a special tax treatment known as the 60/40 split. This allows futures traders to pay on 60% of their gains at long term capital gain rate of 15% and pay short-term capital gain rate on the remaining 40%; creating a maximum tax savings of up to 15%. Misreporting Section 1256 contracts as securities on Form 8949 rather than on Form 6781 causes you to lose your lower 60/40 tax treatment and potentially pay thousands of dollars in unnecessary taxes. Not all brokers report Section 1256 contracts correctly, especially instruments that are not clearly designated as such including some E-mini indexes and options on those indexes. You need to make sure you are reporting your trades correctly and not missing on any tax breaks available to you. Forex can be taxed either as ordinary income or as section 1256(g) that qualifies to the 60/40split mentioned earlier. You will need to know what tax election to make and when to make it. Failure to do so may cost you thousands of dollars in unnecessary tax payments.

Next week, we will continue with items 4-6 on our top ten mistakes traders make when filing their taxes. Until then, have a successful week.

To find out more about how you can avoid audits, reduce taxes legally and keep more of your profits, please visit OTA Tax Pros

On February 21, 2014, the winners were announced for the 2014 FXStreet “Best” Awards—highlighting the top analysis, educational content and contributors on the financial analysis website during the previous year.

Once again, Online Trading Academy’s Sam Seiden was a multiple winner. He was selected for “Best Educational Report” for Lessons from the Pros and “Best Webinars Educator”. Sam was the only multi-winner among all those selected.

Sam’s award-winning efforts are available free of charge to those who want to sharpen their trading or investing skills. A subscription to Lessons from The Pros is complimentary with registration on the Online Trading Academy website—bringing weekly advice and commentary from other top instructors as well. Sam Seiden’s FX Webinars are archived on the FXStreet website and may be accessed here.

The winners were chosen from other 3000 votes by FXStreet readers and viewers. In addition, a professional jury gave their vote. That jury was made of members of the FXStreet experts team as well as professionals with varied backgrounds from other companies. The jury’s members are were Jamie Coleman, Managing Editor of FXBeat; Yohay Elam, Founder of ForexCrunch; Ron Finberg, Editor at Forex Magnates, Antonio Jaureguizar, Partner at Noesis; Valeria Bednarik, Chief Analyst at FX Street,; Gonçalo Moreira, CMT, Content Advisor at FXStreet; and Alberto Muñoz, PhD, Forex Analyst at FXStreet.

Congratulations to Sam Seiden on this outstanding recognition—and congratulations to Online Trading Academy students who are fortunate enough to learn from him and his world-class team every day.

Sam Seiden Speaks about winning two Forex Best Awards