Forex Magnates has partnered with TradingViews – The Interactive Network for Serious Traders and from time to time I’ll post some of the most interesting posts here.
Were the mosquitoes and “no-see-’ems” bad where you live last summer? If you tried with limited success to enjoy nature in parts of the country where summer heat and rain created an excellent breeding ground for biting pests, you well know the value of a good insect repellant.
When it comes to your taxes, one of the best ways to take the sting out of the Internal Revenue Service is to conduct your trading under the umbrella of a “flow-through” business entity such as a limited or general partnership, limited liability company or S corporation.
The IRS has two tax codes: one for businesses, the other for individuals. Because businesses grow money both by paying taxes and employing other taxpayers, they are rewarded and encouraged through a benevolent tax code. Individuals, however, are treated far more harshly by routine tax hikes and diminishing deductions.
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As a trader, your livelihood could hinge upon your ability to prove to the IRS that your trading enterprise is a legitimate business. Fail that and you risk a domino effect whereby your trader tax status is denied, your mark-to-market accounting method is disallowed, and your ordinary losses suddenly loom catastrophic thanks to the $3,000 capital loss limit.
While you can trade as a sole proprietor, we don’t recommend it for several reasons: your trader status remains vulnerable to tax court findings, you have a much higher audit risk, you have no liability protection because your personal assets are not separated from your business assets, and your potential for tax savings is minimal.
The best way to protect and defend your trader tax status is to step out of the pool of mere sole proprietors and trade under a business entity, be it a general or limited partnership, LLC or S Corporation.