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What Are Tax Savings Doing “Trading as a Business”?

What Are Tax Savings Doing “Trading as a Business”?
September 23, 2021 Martha Stokes CMT

What Are Tax Savings Doing “Trading as a Business”?

List of Possible Common Write-Off Expenses

Many Individual Investors and Retail Traders do not know that years ago, the Internal Revenue Service (IRS) established a ruling for the retail side of the Stock Market where they could have the same tax benefits as a Professional Trader. The ruling was done because the Internal Revenue Service must treat all taxpayers in the same manner.

Many people want to learn how to trade in order to make extra income, start a career as a trader so they can pursue other opportunities in their lives, and as an example take control of their life instead of working for a huge corporation. However, your tax status, how you set up your trading, and how you approach trading can dramatically affect what happens at tax time every year. Now is the time to start thinking about next year BEFORE the new year starts.

Individual Investors and Retail Traders who are called “Hobby Traders” by the Internal Revenue Service are not allowed to write off expenses in excess of their capital gains. However, those doing “Trading as a Business” can write off what any other small business or entrepreneur individual is permitted to write off as expenses of doing business.

There are common expenses that Individual Investors and Retail Traders who have established themselves as “Trading as a Business” could possibly be allowed to take. However, first of all you must seek the counsel of a Tax Advisor who is licensed and registered to provide advice.

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You need to find a Certified Public Accountant (CPA) or Tax Advisor who is well-versed and familiar with the Internal Revenue Service ruling for Retail Traders who are “Trading as a Business”. If your Certified Public Accountant or Tax Advisor is unfamiliar with this ruling, which has been around for over 15 years, then find someone who is well-versed in this area of tax law.

The following is a list of possible Stock Trading Common Expenses:

1. Office Expenses. If you have an office, even if it is in your home, that is used exclusively for trading and is set up as an office for trading.

2. Utilities, phone, internet, or any expense that you use in order to trade.

3. Stock Trading Education Expenses. All professions require education, and this is a tax deduction in many instances, including ongoing educational expenses such as the TechniTrader Daily Market Educator (DME).

4. Broker fees and charges. These are not always allowed if you are an Individual Investor or a Retail Trader.

5. Mark-to-Market Inventory Expenses. These can be huge savings.

6. Office Supplies such as pens, paper, copiers, faxes, Trading Journals, etc.

7. Computers and Software are depreciated over a period of time. If you are a Subchapter S Corporation or other allowed entity, your computer(s) and software can be expensed in one year under certain conditions.

8. Employee Expenses, if you hire someone to assist you.

9. Consultation Expenses, if you pay for the advice of a professional.

10. Bookkeeping and Accounting Expenses.

11. Car Expenses, if related to your trading business.

12. Travel Expenses, if for educational purposes or other trading business-related travel.

13. Miscellaneous Expenses relating to your trading business.

While Individual Investors and Retail Traders are not allowed to deduct beyond their investments or trading profits, a person “Trading as a Business” is allowed to deduct expenses beyond their total profits.

The Internal Revenue Service makes distinctions between Hobby Traders and Retail Traders who are “Trading as a Business” in the same manner as any small business or entrepreneur which include the following:

1. You must be intent on making a profit and not just doing it for fun or as a hobby enterprise. TechniTrader Students learn how to do “Trading as a Business”, including how to trade in a Professional Style and Perspective.

2. You must keep records of your trading. TechniTrader Students receive a Trading Journal to help keep accurate records of trading activities, and they are also encouraged to maintain accurate documentation of their trading business.

3. You must show that you have the Education and Business Experience to be “Trading as a Business”. TechniTrader Students have a complete Trading Process and a complete Trading Education. They also receive a Certificate of Completion when they have finished their Methodology Essentials Course in its entirety. Everything TechniTrader presents is to prepare Students for successful Professional Trading as a career if they so choose.

4. Profitability is part of being in business. The Internal Revenue Service requires a certain number of years out of every 5 to be profitable for self-employed individuals. TechniTrader Students learn more than just a Strategy, Indicator Crossover Signal, or Candlestick Pattern. What TechniTrader teaches gives Students everything they need to be consistently successful, backed up with the finest support available to investors and traders. Every TechniTrader Student is expected to have a 75% success rate on a Trading Simulator before risking their hard-earned money trading stocks. This is significantly higher than the common 40%–50% that most traders achieve. What makes the difference is the TechniTrader Support Team’s dedication in helping our Students achieve professional-level profitability.

Types of Trading Businesses:

1. A Sole Proprietorship is the most common small business status, with one employee. It is the owner individual who is self-employed and in business for themselves. It is simple and requires minimal effort to start.

2. A Limited Liability Company (LLC) is another form of small business and is somewhat better for many Retail Traders, offering certain benefits that self-employment does not.

3. A Subchapter S Corporation is a sole proprietorship that has the benefits of a corporation, shielding the individual’s assets from the business assets. This is advantageous for traders with larger capital bases who are trading aggressively and making high income levels.

Before starting “Trading as a Business”, consult with Tax Advisors and experts who can recommend the best business structure for you. Each has different tax benefits and requirements.

Summary

Again, you must seek the counsel of a Tax Advisor who is licensed and registered to provide advice. You need to find a Certified Public Accountant (CPA) or Tax Advisor who is well-versed and familiar with the Internal Revenue Service ruling for Retail Traders who are “Trading as a Business”. If your Certified Public Accountant or Tax Advisor is unfamiliar with this ruling, which has been around for over 15 years, then find someone who is well-versed in this area of tax law.

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Trade Wisely,

Martha Stokes CMT

Chartered Market Technician
Instructor & Developer of TechniTrader Stock & Option Courses

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Martha Stokes, CMT is co-founder and CEO of TechniTrader. She is a retired professional Buy-Side Analyst and was awarded the Chartered Market Technician designation for her thesis, "Cycle Evolution Theory." Martha is a passionate teacher of the financial markets and a prolific writer, having created over 40 stock, option, and financial market courses.