Trading Your Way to Tax Breaks

Below is an excerpt from my upcoming third book My Happy Assets - Taking the Last Steps to Financial Independence.

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If you trade enough and run your investments as a business, you may qualify as a trader and gain access to an assortment of tax breaks. Now, you will still get taxed off the top your investments at a capital gains level …

Capital Gains Rates
Holding Period	Capital Gain Rate	Other Requirements
Less than 12 months and a day	Normal tax rate (15% to 36%+)	None
At least 12 months and a day	Max. rate (0% to 15%) plus state rate	None

	Type of Investment	Character of Gain or Loss	Investment/ Business Expenses	Interest Expenses
Trader	Stocks, bonds or options	Capital gain/loss	Business expense	Business interest

But, at the end of the day, you are still running a business so you still get to deduct business expenses after the capital gains hit. You can see from the above chart that a short term investment, anything held less than 12 months and a day will taxed at your normal tax rate, 15% to 36%, and anything held longer will get hit at rates from 0% to 15%. In the second table, you see that stocks, bonds and options are taxed at the capital gain or loss rate, business expenses are deductible as business expenses after the capital gains hit, and interest expense is deductible as business interest.

As far as expenses go, achieving trader status means that you can deduct all convention and seminar expenses that are directly related to your trading business and any other reasonable business expenses just like a normal business. The expenses are reported on IRS Schedule C. Additionally, a trading business is not subject to social security taxes unlike most typical businesses.

How to Qualify as a Trader

The bottom line on this is that the IRS does not have a strict definition for a “trader” but there are plenty of court cases … it’s not good enough to merely put a lot of time into managing your investments, you must also trade frequently. You must “trade securities on a frequent and regular basis in order to catch the short-term market swings. In one case, 75 transactions was deemed not enough. In one case, 332 transactions worth a total of $3.2 million was deemed “trader” status. Additionally, your trading needs to be year round, not just during a small window of time during the year. Also, a substantial amount of your income cannot come from dividends, interest and long-term capital gains regardless of the number of trades. You also need to be the money manager, working 100 hours per year more than anyone else or working at least 500 hours per year and should be making all purchase and sales decisions. Again, file expenses on the Schedule C.

Trader Business Expenses … Deduct Away!

· Accounting and bookkeeping fees

· A portion of your home expenses

· Car expenses allocated to your business

· Subscription to investment publications and newsletters

· Books on investing, trading and security analysis

· Seminars on investing, trading and security analysis

· Video and audio tapes on investing and on security analysis

· Tax advice

· Equipment depreciation for business (computers, calculators, cell phones)

· Any investment reporting service

· Salaries of assistants and helpers

· Brokerage fees

· Meals and entertainment of analysts, brokers and other related people