[16:39] <Jay> ok gang, gonna give the floor over to Simona and Bob for the tax seminar
[16:39] <Jay> pls let them start off and then they will ask for questions
[16:40] <anres> jay can talk and write at the same time, I dunno how
[16:40] <Simona> hi gang, for those of you who don't know us, we're CPA firm catering exlusively to active traders
[16:40] <Simona> you can find us at www.edaytradertax.com
[16:40] <reactionary> hi bob and simona! :)
[16:40] <meany> Hi all!
[16:41] <meany> We are going to speak about two items today
[16:41] <libero> greetings from europe , portugal(from a finnish citizen just ot make that clear) :)
[16:41] <Simona> bob will start out talking about the Mark to Market election a bit, and then I'll cover wash sales a little... we're splitting the typing :-)
[16:41] <meany> One of the most confusing items of all trader taxation is what are the various options on how to handle losses
[16:42] <meany> of course no one here has losses, but acutally 2000 and 2001 have not been kind to traders
[16:42] <meany> I will assume for the point of discussion that all of you in this room are full time traders.
[16:42] <meany> If you are not, then you may be considered an investor and will be treated differently on your tax return (see www.edaytradertax.com for details).
[16:43] <meany> When you become a full time trader, you will be completing your return probably on a schedule C, for a sole proprietor
[16:43] <Simona> (see www.edaytradertax.com/questions.htm for help where you might fit in)
[16:43] <meany> Some of you may be in a trading partnership or corporation which we will not discuss today.
[16:44] <meany> When you file a schedule C you are entitled to numerous business deductions. (see http://www.edaytradertax.com/deductions.htm )
[16:44] <meany> However, how do you handle your trading gains and losses?
[16:44] <meany> If you are NOT an mtm (mark to market) trader, the gains and losses will be capital in nature, and will be put on your schedule D.
[16:44] <libero> gains much better
[16:45] <meany> lol The maximum loss for any year will be $3,000 - any more than this will be carried forward
[16:45] <meany> . All gains, if short term, will be taxed at your ordinary tax rate.
[16:46] <meany> Long term gains should not even come into consideration if you are a day trader, but they will be taxed at either 20% or 10% depending on your tax bracket.
[16:46] <meany> If you are an MTM trader, all gains and losses are no longer capital, but considered ordinary income or loss.
[16:47] <meany> These are reported on IRS form 4797, and transferred to your schedule C. (see http://www.edaytradertax.com/tax_options_table.htm )
[16:47] <meany> Whether you are a trader, with MTM or not, filing a schedule C, you will NOT have to pay any self employment taxes.
[16:47] <meany> The reason for this is that it is not considered "earned income".
[16:47] <speedster> very cool
[16:48] <meany> Of course since it is not earned income, you cannot use it for a SEP or IRA. (You can do this but it requires another type of entity and another seminar)
[16:48] <meany> Why is the MTM designation so important?
[16:48] <meany> Well, if you had 50,000 in losses as a non MTM trader, the most you could claim in one year is $3,000.
[16:49] <meany> . The rest would be carried forward.
[16:49] <meany> With the MTM election, you can deduct the whole $50,000 as an ordinary loss.
[16:49] <meany> If you do not have any other income for the year, or your other income only partially absorbs the loss, you may then carry this back two years
[16:50] <meany> As it is a business loss, or elect to carry it forward only
[16:50] <meany> If the entire loss is not used up in the past two years, anything left over may be carried forward.
[16:50] <meany> Additionally, with the MTM election you no longer have to "worry" about wash sales
[16:51] <meany> not that most of us traders do anyway, lol
[16:51] <meany> All stocks held as of 12/31 are "marked to market" at that time, and any gain or loss from the price at the end of the year is recognized
[16:51] <meany> This can save a lot of headaches, for you and us.
[16:52] <meany> So what are the down sides of the MTM election? .
[16:52] <meany> ? First it is irrevocable
[16:52] <meany> which is no big deal
[16:53] <meany> as you would be using it for your trading accounts only, and if you stopped trading then you wouldn't use it anyway
[16:53] <meany> , Second, you have to do what is called a 481 adjustment the year before the election takes place.
[16:53] <meany> So what the heck is a 481 adjustment
[16:54] <meany> don't ask your chiropractor
[16:54] <reactionary> heh
[16:54] <esegg> Does this mean if you haven't done a 481 then you can't do MTM for 2001?
[16:54] <meany> Well, let's say you file for mark to market for the tax year 2001
[16:54] <libero> dentist?
[16:54] <meany> esegg, maybe, will talk afterwards
[16:55] <meany> At the end of the year 2000, you would inventory all of your stocks, and mark them to market at the end of the year price.
[16:55] <meany> . If you have a gain or loss of $25,000 or more, you have to amortize that over 4 years. If it is less than $25,000 you may claim it in the first year totally.
[16:55] <meany> We will not get into it right now, but as a corporation or a partnership you may also file the mark to market election
[16:56] <meany> How do we file the mark to market election? esegg this may answer your question
[16:56] <Simona> (feel free to dcc any questions)
[16:56] <meany> Well it's too late for 2001 - you would have had to file it by the ORIGINAL, not extended due date
[16:56] <meany> - no exceptions for individuals, no arguments, no successful challenges as yet!
[16:57] <meany> This is done by sending a letter requesting the mtm election to your regional IRS office and the national office, again by April 15th.
[16:57] <meany> . If you need to file an extension the election must be filed by the extension.
[16:57] <esegg> OK, for next year then. Having a full time job does not mean you cannot use MTM does it?
[16:57] <reactionary> you have to be a full time trader to qualify... correct?
[16:58] <meany> well the irs looks at other full time employment esegg, and reactionary, yes
[16:58] <meany> When your tax return for 2001 (assuming you filed the mtm election by April 15th) is due,
[16:58] <meany> then you file a form 3115, which makes the election on your return and completes the 481 adjustment (the $25,000 if it is required) that we spoke about earlier.
[16:59] <meany> For our clients, we handle the compilation of all of these forms and letters
[16:59] <buk4me> thank god
[16:59] <meany> Additionally, if you are not mark to market we complete a wash sale analysis, as well as doing the actual wash sales. http://www.edaytradertax.com/wash_sale_2001.htm
[16:59] <meany> Which brings us to the next part of our seminar; those dreaded and often misunderstood WASH SALES http://www.edaytradertax.com/wash_sale.htm
[17:00] <meany> Simona, should we take questions on mtm now or wait till you are thru with wash sales?
[17:00] <esegg> MTM kind of important, no? Wash sales a whole messy topic.
[17:00] <meany> did i put her to sleep
[17:00] <Simona> let me summarize some answers to questions I am giving on dcc
[17:00] <meany> sure, and yes esegg
[17:01] <Simona> yes, for 2002 MTM you need to elect by April 15
[17:01] <Simona> CAUTION !!!! MTM election is NOT for EVERYONE!
[17:01] <Simona> there are some very specific cases when it's the worst possible thing a trader can do, from a tax planning perspective
[17:01] <Simona> be sure to discuss this with your tax professional before electing it
[17:02] <buk4me> what are the pros and cons of mtm?
[17:02] <meany> if you have big losses as a regular trader, you need to review this carefully
[17:02] <meany> as
[17:02] <dcatrader> could you please give one example of worst possible case for bad MTM decision?
[17:02] <meany> they cannot be carried over to mtm
[17:02] <Simona> buk4m3, go here: www.edaytradertax.com/tradermtm.htm
[17:02] <meany> they are capital losses, mtm are regular losses/income
[17:03] <meany> so we usually do not recommend mtm status if you are carrying over large losses
[17:03] <dcatrader> I see
[17:03] <meany> you have some other questions simona?
[17:04] <Simona> can I claim MTM if I have a full time job? normally, the answer is no.
[17:04] <dcatrader> doh!
[17:04] <Simona> you will not be able to defend you are trading as a profession if you have a 9-5 job, unless you're in a different time zone
[17:04] <reactionary> part-time?
[17:04] <Simona> (we have a guy trading from the Marshall Islands... hehe)
[17:04] <meany> part time may or may not cut it, court decisons have not come thru yet reactionary
[17:05] <reactionary> sounds sticky
[17:05] <reactionary> i'll wait untill i go fulltime
[17:05] <esegg> Hate the MTM rules. Just because you have a job doesn't mean you ain't a trader.
[17:05] <meany> true, but this is not just for mtm
[17:05] <meany> it's also for just trader status
[17:05] <dcatrader> double doh!
[17:06] <Simona> you simply have to be able to justify it as your primary source of income
[17:06] <dcatrader> what kind of extra tax hit are we talking about if you can't qualify for trader status?
[17:06] <dcatrader> major?
[17:06] <reactionary> probably depends on how much you're making trading
[17:06] <meany> well you can claim expenses on sched a as an investor
[17:07] <dcatrader> ok...THAT'S good
[17:07] <meany> but you need to have enough to itemize
[17:07] <reactionary> oh yeah... jay helps us with that :)
[17:07] <dcatrader> so will the trading income actually be taxed at a higher rate if you don't have trader status?
[17:08] <meany> no dcatrader
[17:08] <meany> any short term capital gain is taxed at whatever rate you are at anyway
[17:08] <meany> it's only long term capital gain that you get a break on
[17:08] <dcatrader> so...trader status, the tax rate is...??
[17:09] <meany> depends on your income level
[17:09] <dcatrader> in other words, what's advantage of trader status, then?
[17:09] <meany> 28% 15% 39.6% etc
[17:09] <Simona> dcatrader, keep in mind that there are 2 types of traders
[17:09] <buk4me> the major difference beteween investor and trader is how much you can count as losses and how many diductions you areallowed?
[17:09] <Simona> basically there are three relevant classifications.. please visit www.edaytradertax.com/questions.htm
[17:09] <dcatrader> * running off to website now...
[17:10] <meany> dca, you can deduct a lot more items, for example, all of your margin interest, and don't forget that approx 7k of itemized deductions are needed before you can even itemize, so you have a threshold to get past
[17:10] <dcatrader> understood meany, thank you :-)
[17:10] <meany> while ALL of your sched c expenses can be deducted, from 1$ on up
[17:10] <meany> (:
[17:10] <ghostrider36> I have a full time job, however my account didn't say any thing about it and filed for mtm in 1999 and I took it in 2000. haven't heard from them yet.
[17:11] <meany> well you may never hear from them, keep your fingers crossed
[17:12] <meany> as long as you can justify time spent, and income, you may be ok, Irs is still "feeling" their way around
[17:12] <buk4me> wow,so its a crap shoot?thats not very comforting
[17:12] <Simona> buk, what is....?
[17:12] <meany> not a crap shoot if it is your full time occupation though
[17:12] <ghostrider36> I won't be so lucky, had big losses so no tax.
[17:12] <buk4me> you said keep your fingers crosed
[17:13] <meany> for an audit, if you have another full time job
[17:13] <buk4me> oh o.k. sorry
[17:13] <Simona> buk, that was for ghostrider's post... if you have a solid case, it's fine
[17:14] <krb> can you file mtm if you started trading full time halfway through the year but had a fulltime job prior to that?
[17:14] <Jette> FYI, catching up, I work full time *but from home* and am MTM last three years (two yrs?)
[17:15] <Simona> ghostrider, also keep in mind that IRS "expects" a business to generate a profit at least 2 out of 5 yrs... if you show consistent losses, that is another red flag for an audit trigger, fyi
[17:15] <meany> krb, you would have had to file by april 15th
[17:16] <krb> oh, i see, so have to file by april 15th for 2002, not 2001?
[17:16] <Simona> Jette, perhaps that means you are able to do your work outside of the market hours :-)
[17:16] <Jette> I guess so!
[17:16] <meany> excatly krb
[17:17] <arky> So if we want MTM for 2002 tax year we need to write IRS before 4/15/02, correct?
[17:17] <meany> 2001 would have had to be filed by april 15th
[17:17] <meany> yes arky
[17:17] <krb> meany, could I file as regular trader?
[17:17] <Simona> again, please remember to consult with your tax professional before jumping into anything. as we've explained, MTM is NOT the answer for everyone
[17:18] <meany> if it was less than 1/2 the year I would not adivse it, suggest you take investor route, its conservative but safe
[17:18] <krb> thx meany
[17:18] <Simona> more questions?
[17:19] <meany> but for 2002 would be different
[17:19] <krb> thx
[17:19] <meany> probably can go to wash sales, Simona
[17:19] <Simona> we had planned to touch on the wash sale losses, but it would probably take another hours or so, should we ask Jay to re-schedule for another day, or continue?
[17:20] <buk4me> another day
[17:20] <arky> does filing for MTM status invite an audit?
[17:20] <arky> another day
[17:20] <meany> not necessarily arky, we usually send a letter with the return, documenting the filing
[17:20] <meany> it could if there is a lot of other income
[17:21] <Simona> arky, many things raise red flags at the IRS, such as losses, Schedule Cs in general, etc... if you have your ducks all in a row, you should be fine though :-)
[17:21] <meany> you have to remember irs does not have a lot of hard and fast rules on trading, they are still developing them, and each year are getting more specific
[17:21] <dcatrader> can we e-mail question to meany or Simona later?
[17:21] <meany> there have not been many court cases, we will be seeing some
[17:22] <meany> sure dca
[17:22] <Simona> sure, simona@edaytradertax.com, bob@edaytradertax.com
[17:22] <dcatrader> Thank you.
[17:22] <buk4me> bob great sreen name,lol meany?
[17:22] <buk4me> you trying to tell us something?
[17:22] <meany> hehe, I really am a meany though,
[17:23] <Simona> shhh, buk, that's his real name <GGG>
[17:23] <buk4me> well thats incouraging cant wait to talk to meany on the phone,lol
[17:23] <meany> just ask Simona if I am a meany
[17:23] <dcatrader> Anywhere we can view updates on recent trader tax court decisions?
[17:23] <meany> believe it or not there are no recent ones
[17:24] <Simona> dca, they tend settle most as private rulings, so they don't get out and set precedents
[17:24] <meany> we will be seeing some in the next year, it takes 3 or 4 years to get to court usually
[17:24] <dcatrader> interesting...
[17:24] <meany> and i have no private rulings to share, none are recent
[17:25] <meany> we are fighting a couple right now on fuzzy issues
[17:25] <meany> the www.irs.gov site has some information on trading now as well
[17:25] <reactionary> yeah...looking forward to trader status... got an office already... lots of expenses... just gotta cut the cord
[17:26] <reactionary> :)
[17:26] <Simona> i have an IRS faq on trading linked on our website somewhere
[17:26] <Jay> thanks bob and simona :)
[17:26] <Simona> i think on www.edaytradertax.com/trader.htm
[17:26] <meany> Thank you Jay and the group, good questions!
[17:27] <Simona> thanks for having us gang, and we will be baaaack, I really want to share some important information on wash sales
[17:27] <dcatrader> Excellent, guys...thanks!