Setting up a legal entity to run your trading business can be a phenomenal way to reduce taxes in to
simply optimize your tax return.
And this is why in this section, I am going to explain to you the benefits for active traders who incorporate
as trading becomes more accessible from the proliferation of online and discount brokerages as a result
of the proliferation of online and discount brokerage firms.
More people are participating in the stock market each day each week.
However, as an individual or sole proprietor, traders cannot take advantage of some of the tax advantages
and asset protection strategies that are available to companies working as an independent trader, it
can be a way for individuals to make extra income or even possibly full time living.
But like any other business venture, the income generated from trading is taxable.
If you are successful as an independent trader, it can create significant tax liabilities for you.
Individuals that want to actively participate in the stock market have several options they can trade
as individuals or sole proprietors qualify for trader status or trade through a business entity.
For the active trader, creating a illegal trading business will often provide the best tax treatment
and asset protection.
According to IRAS Internal Revenue Service, trading is not a business activity, in fact, or income
from trading is considered unearned or passive income.
This presumes from the perspective of the IRAS that individuals are investors, and any trading activities
are done for a long term capital accumulation rather than paying for current liabilities.
For this reason, unless an individual can qualify for a trader status, they will be treated like any
other tax filing.
Individual income from trading can also not be reduced by contributing to an individual retirement account
IRA or a pension fund.
The only advantage of being considered a passive trader is that the income derived from trading is not
subject to additional self-employment taxes.
After that, deductions are the same as what is normally afforded to W-2 wage earners, generally limited
to mortgage interest, property taxes and charitable deductions.
The amounts of most deductions are restricted to a percentage of adjusted gross income because trading
is not considered a business activity by the IRS.
All the expenses necessary to trade are not eligible as tax deductions.
For most active traders, the cost of necessities such as education, a trading platform, software,
internet access, computers, etc. can be considerable for most traders.
The biggest tax issue they face is that deductions for trading losses are limited to gains.
After that, only $3000 can be deducted against ordinary income.
In a year where net capital losses exceed $3000, individuals can only carry forward three thousand
of that loss per year against future income.