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Trading Entity Formation
The tax code changed, and in order to utilize your trading activity for tax benefits, you need the right tax status. With the IRS, there are three tax statuses given to traders. By obtaining the correct tax status for your situation by setting up a specific type of LLC or Corporation, you could save THOUSANDS every year in taxes even if you are just starting out. Learn more about how we can help you.
LLC & Corporation Formation
Default Trader Status
This tax status is given to traders in the market who do not have an established business. It is categorized by the IRS as a “Hobby Trader”. This is the default status given to traders.
With the change in the tax code as of 2018, “Hobby Traders” cannot deduct business expenses or expenses that are directly related to the market. Essentially, there are no tax benefits from Default Trader Status.
Active Trader Status
In order for traders to take any tax advantage from their investment activity, they must qualify as an Active Trader. In order to do so, traders must meet a litany of requirements. Most investors fail at least one of the following:
- Must trade continually in the markets (no breaks)
- Must have a specific volume of trades per month
- Must derive a majority of their income from their investment activities.
Self Employed Trader Status
The IRS has allowed individuals to obtain Self Employed Trader Status by trading through a specific type of business entity structure to take tax business deductions, without qualifying as an Active Trader.
With Self Employed Trader Status, Investors can take itemized deductions for business expenses, take itemized deductions for costs directly related to the market (commissions, software, etc.) travel, and capture the max portion of capital losses.