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.
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 http://www.tradingacademy.com/otatax/.
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.
For most us, trading is about money, perfecting our craft to achieve the highest rate of return while minimizing risk at all times. The only real outcome is our account balance at the end of the day, week, month and annual rate of return. These numbers are private, and something that I normally do not talk about to others, even my close trading friends. I’ve had this feeling for years, that when I brag or boast about trades that the market is listening and ready to kick me in the teeth for bragging!
My good friend, Trey Lazzara runs a trading company called Trade Pro Futures, which is a futures and forex broker. He has had access to my results for years and told me about this longstanding trading competition, with real money. I thought it might be a terrific opportunity to compete with other traders from around the world.
The contest is from January 1st until December 31st 2014, and the results are visible to everyone anytime at http://www.worldcupchampionships.com/live-stats-3
The first month of trading was pretty good for me. I had a couple notable trades on the Yen, and Canadian dollar which gave me a nice jump start to the year. I ended January with an 18.2% increase in my account, even with a couple of poor losing trades. Not a bad start!
All trades are made using the Online Trading Academy methodology of Market Timing on multiple time frames. Trading involves significant risk of loss and is not suitable for everyone. Past performance is not necessarily indicative of future results.
Even with the numbers above, the trading is not what I wanted. I had a winning Percentage of 60%, and average winners and losses were about the same size. My goal is to get back to 65% winners, and get my winning trades a little more than my losses, preferably double! As always, this is all about money management and avoiding the big losers. Every month I’ll give you an update, and if I have time, highlight some of the better trades!
From seasoned finance professionals looking to strike out on their own to relative novices who crave an exciting, fulfilling career, trading attracts people from all walks of life. Given this diversity, it’s hard to make sweeping generalizations about the “modern trader.” One of trading’s greatest strengths is its broad appeal and accessibility.
Most traders cite a few common reasons for their choice of career. Let’s look at five things to love about trading:
1 – They Earn Every Penny of Their Worth
Over the past decade or two, employers across a wide range of industries have warmed to the concept of performance-based compensation. Restaurant managers, engineers, legal professionals, Web designers and many others stand to earn significant bonuses or profit shares for reaching pre-defined goals during the course of a project or accounting period. These windfalls often make otherwise unrewarding jobs palatable.
For traders, on the other hand, performance-based compensation is the norm. People who trade stocks, futures, forex and other instruments for a living earn exactly what they’re worth. While this demands flexibility, responsiveness and constant effort, the payoff can be tremendous: Whereas a designer or engineer might earn a 10-percent bonus for a successfully completed project, traders’ earnings are never capped.
2 – They Get Paid to Get Rich
Financial professionals are often accused of selfishness, but such criticisms miss the point. It’s not selfish to be in business for oneself and one’s family. Successful traders get paid to enrich themselves and their loved ones by employing honest, repeatable strategies. Their earnings aren’t contingent on pleasing fickle bosses, meeting nebulous goals or aligning factors beyond their direct control. Better yet, daily profit and loss figures provide detailed, real-time feedback. When it comes to their performance, traders always know where they stand.
3 – They Set — and Reach — Their Own Income Goals
Since they don’t answer to anyone but themselves and their families, traders don’t have to worry about achieving unrealistic benchmarks that may not be directly tied to their job performance. This business rewards the ability to employ proven strategies that can generate earnings in any market environment. Based on their selected strategies, their personal income goals, prevailing market conditions and other factors, traders have the freedom to set their own income goals without worrying about impressing superiors or clients. Their minute-to-minute activities may involve some stress, but traders take solace in knowing that their goals are theirs alone.
4 – They Enjoy Enviable Freedom
Traders work as much or as little as they want. While traders who focus on stocks and commodities must be active when markets for those instruments are open, those who dabble in forex or other securities can work productively at odd hours. Of course, those who don’t take extra time to research securities, analyze market trends and delve deeper into the finer points of trading may miss out on opportunities or make costly mistakes. Without anyone chaining them to a desk, though, traders are free to spend time with their families — or take some much-needed “me time” — during the week.
5 – They Have Crucial Leverage
Traders enjoy personal, professional and financial leverage. These days, too many workers — even those who earn a decent income as white-collar professionals — toil in unsatisfactory occupations because the alternatives appear to be worse. Whether they’re keeping a job for its relatively inexpensive health insurance benefits or its “generous” time-off allowances, these folks accept unsatisfying working conditions in exchange for relative social and economic stability.
Hardworking traders, by contrast, don’t have to worry about this trade-off. With substantial reserves of working capital, traders can test and deploy new strategies that further boost their professional independence. On a personal level, flexible working hours and the promise of ample cash flow create social leverage that improve traders’ relations with their families and allow them to enjoy their non-working hours.
Who wouldn’t want a career that offers all these advantages? Trading won’t make someone rich overnight, of course, but it’s one of the few occupations that allows one to control their income, set their own deadlines, and leave a trail of meaningful accomplishments in their wake. Enroll in a half-day class at a local financial education center to learn more about the myriad benefits of an online trading career.
It’s always entertaining to see the most-searched pop star, movie or actress, but stock traders and investors might be especially interested in the traffic by company name and ticker, reported on Stock Trends.
That’s because favorable (or unfavorable) news on a company can often have an immediate affect on its stock price. So let’s take a look:
No surprise here. In addition to being a fascinating and evolving company in its own right, FB was involved in a difficult IPO in which many investors ended up buying shares at a high price that almost immediately headed south. It would be more than a year before the stock recovered its initial price in the mid-40s. The social media company was constantly in the public eye for changes in its privacy practices and interest ran at a high and consistent level all year.
In contrast to the consistent interest in FB, TSLA had significant peaks and valleys that related to its gyrating stock price and news about battery fires in its electric vehicles. At the end of the year the stock was up well over 300%, rewarding investors who had hung on for the wild ride. (Of course, there were much greater profits for those traders who were able to buy at the bottom, get out at the top, then repeat.)
The microblogging company didn’t go public until November, but had consistently high search volume throughout the year. The managers of its IPO learned from the Facebook experience and priced it at $26 per share, a level many analysts felt was low. The stock quickly reached $45 and traded at over $70 before settling around $63 at year-end. Positive news on TWTR focuses on its potential for monetizing its service through sponsored tweets and other money-making strategies.
The search company was itself a popular search, with consistent volume throughout the year. There were no major news stories, but it’s impossible to ignore GOOG and it was a strong stock performer with a price that topped $1000 by year end. Interestingly, the most popular week for Google was November 17-23, just before Thanksgiving, where many analysts and economists were attempting to spot shopping trends for the holiday season.
BBRY attracted news interest for all the wrong reasons and had a search history that resembled the peaks and valleys of TSLA. Interest peaked when the company announced a new operating system in February, was high again in March (a new cellphone launch) and September (a disastrous earnings report), then declined after November 5, when the company fired its CEO and announced it would no longer try to sell off its assets.
More information is available at Google’s Stock Trends page where readers can drill down into regional interest, related search terms and a number of other details.
2013 was quite a year for the equities markets, with records set by two of the three major indices and the S&P 500 up nearly 30%. Even in a red-hot market, not all stocks are created equal. Here are five we followed at Online Trading Academy; some did dramatically better than the overall market while others managed to march in the opposite direction, but all were fun to watch and exciting to trade.
Analysts made dire predictions for the future of Netflix in August 2012 after it split its DVD and streaming video businesses and announced a dramatic subscription price increase. Subscribers left, and shares sank, opening 2013 in the low 90s. Despite this, the subscribers came back and so did investors, lifting the price to a year-end close over 382—more than a 400% increase making NFLX the top performer in the S&P 500.
Tesla Motors (TSLA)
Part of the appeal of this company is its product—the super-fast, super-green Tesla S electric sports car. Tesla caught fire in early may, with a daily volume increasing from under 1 million to over 28 million shares. After starting the year at under $40 per share, TSLA climbed to over $190 on September 30. Then Tesla caught fire again when battery explosions had been reported in some of its vehicles. TSLA slumped to under $120, before recovering to $150 at year end.
Best Buy (BBY)
Best Buy had a terrible 2012. Founder Richard Schulze left under a cloud and failed at an LBO, and the stores had become an online showroom for shoppers who would check out the goods in person, then order them from Amazon. Amazon leveled the playing field after it started charging sales tax, and Schulze returned as Chairman Emeritus. Store sales strengthened throughout the year and, after declining 40% during 2012, BBY climbed from $12.12 to $39.88 during 2013.
J.C. Penny (JCP)
Here’s the BBY retail story, but in reverse. After struggling for several years, J.C. Penny hired Apple hotshot Ron Johnson who attempted to turn around the discount retailer by eliminating discounts. The results were disastrous, and by the time Johnson was fired in April JCP had dropped from a high of $23 to $14 per share. Sales continued to stagger but firmed slightly during the holiday season, suggesting the store may not be dead yet. Even so, JCP fell from $20.50 to $8.88 during 2013, nearly a 57% decline.
Does anyone knows how much Apple is really worth? Does anybody actually care? In 2012, it was briefly the most valuable company in the world, priced over $700 per share. After opening 2013 at $553.82, AAPL plummeted below $400 in April, and many media gurus predicted it would go still lower, but the price recovered (in spite of less than stellar sales for its latest iPhone, and no significant new releases in the pipeline) and AAPL closed the year at $561, or virtually unchanged.
Which one of these stocks do we like for 2014? All of them! What they have in common is volatility, making them ideal candidates for our patent-pending strategy which allows us to pick high-potential, low-risk opportunities based on price performance. To find out more about this strategy, enroll in a free half-day class at your local financial education center.