Tax Advice From Options & Futures Trading Pros

[Music] [Applause] hello hello i am christy ross and welcome to taxes for traders 2020. normally we do this tax segment in april but several requests have come in to do it at year end when there's still time for more actionable tax planning totally get that so it's going to be a bit of a hybrid this year best of both worlds hopefully it's still a lot of the similar content that i've covered before which we've posted in our archives but with all of the new viewers i wanted to put something out there that's fresh and add a few things as well as answer your most pressing tax questions so thanks for sending those into taxes at tastytrade.com any that i don't get to today at the end of the segment uh i will send you an email back so this time i'm bringing in a couple of other friendly faces to mix it up so you don't have to listen to me for the full segment uh and let me quickly add in my public service announcement my disclaimer we don't give tax advice at tastytrade tastyworks or any of our subsidiaries what i do hope for though is that this will at least help you tee up the type of tax topics that you may encounter as a self-directed investor especially trading options and futures which i think for a lot of people um especially if you're new to that can can be confusing in the beginning so hopefully we'll we'll uh run through that we'll simplify a lot of this stuff and let's get started okay so this is how i have structured this segment i want to do an overarching umbrella starting with who you are as a trader then we'll talk about what you trade what products do you trade and how those uh gains and losses are treated for tax purposes as well as the forms you need to use and whether wash sales apply or not uh as well as we'll get into if you are trading as a business what some of those requirements are and then we'll dive into some of the uh hottest questions that get asked at tasting works as well as some other questions that you have sent in to texas.tastytrade.com and then also some tax planning tips from our outside accountant and lastly we will help you maneuver the tax center over at tastyworks so that's the game plan for today's segment now i have brought in as i said some friendly faces we have matt helmuth who is the cfo of tastytrade we have jason chow who you may have actually talked to or maybe uh like shared emails with if you were reaching out to tastyworks at all around and tax questions are looking for tax forms so we're going to bring him on today and then tom dwyer who is an outside accountant and tax attorney cpa who has worked with a number of traders over the years so he will share his wisdom with us and give us uh some tax planning tips as well and we'll bring these guys in throughout the segment um in in different areas so look forward to seeing those guys and talking to them today let's get started on the overarching umbrella of first figuring out which category you fit into as an investor as a trader so there are three categories in the in the way that i view it first of all there is an individual self-directed investor that's a majority of us okay we are doing this on the side staying engaged with our finances uh but maybe we have a day job or maybe we're not spending all day uh on trading but it's rather just this i it really is just sort of the side investing side trading um that is not our primary source of income so that is a majority of us i'm sure but then there is the group of individuals who want to do this as a business who are spending a majority of their time trading who also view this as their only source of income uh that doesn't mean if you fit all of those it doesn't mean you you should do this as a business it's just saying you could qualify to do this as a business in the irs's eyes and so there is a special election and we're going to talk more about this later which is the 475 f election which allows you not only that you're viewed as trading as a business but you would get to mark your positions to market at your end and you essentially um don't need to report wash sales we're going to get into all the details of this but you have a completely different tax treatment than someone who is just an everyday investor doing it on the side okay and then there's this hybrid in the middle and that is trading as a business without this special election so you're going to fit into one of those categories and hopefully by the end of this you'll know where you um where you belong and also what the tax ramifications are within each one of those categories let's talk about what products you're trading so i put this into three categories you're trading stock and equity options or broad-based index funds and options on them or features and futures options or all of the above i'm not going to cover forex today we don't offer 4x at tastyworks uh and we're not going to cover crypto today but crypto is right around the corner so i will do a brief tax segment once we um are offering crypto at tastyworks okay so stock and and stock options you are probably most familiar with the broad-based index funds this second category is what causes the most confusion so as you can see um on this slide i've labeled rfc next to broad-based index funds and rfc next to futures and options on futures that is referring to a title within the internal revenue code which is regulated futures contracts so as we would all suspect um that shouldn't cause confusion for futures but it does if there's other things that fall into that category that aren't necessarily labeled as such so broad-based index funds are index funds that have 10 or more securities and they trade and look like and smell like a a security like a stock but they get different tax treatment so we're gonna talk a little bit more about that and and what that means but i'm highlighting it because that is the area again that causes the most confusion for traders so let's move on to the forms in which you need to file depending upon who you are and what you're trading but before i talk about the tax forms that you are going to report to the irs i'm going to start out with the tax forms that you actually receive so you will receive what's called the form 1099 from your broker and the 1099 there are going to be depending upon what you trade they're going to be essentially two different kinds of you could get and so the first one and then putting it up here now is the 1099 um i'm going to call it consolidated because your interest dividends as well as um your trading a big chunk of your trading is going to be included uh on here so you have your stock and your equity options that are reported detailed all of the detail for all of that trading in your stock and equity options is going to be reported here and if you see this box uh there that points out you're going to report all of that detail on your 89 49 if you are an individual now if you traded broad-based index funds that trading is going to be in a different category on that same consolidated 1099 under the rfc regulated futures contracts um category and remember that's what can be confusing but it's right here on your consolidated 1099 for any of those that you traded and that's going to flow through to your 67.81 now i'm only talking about basically you as an individual right now and you'll see how that flows that if you're trading as a business but the this form right here is let's call it um let's call it this is your main 1099 and then you will receive a separate 1099 for your futures trading and so that that 1099 looks a little different um it's a form 1099 b for your futures and this is a one line item basically that will flow through to your 67 81 so remember your broad base index funds and your futures both flow to your as one line items okay you don't have to report all the detailed trades for broad-based index funds or futures again futures are going to come from this other 1099. so hopefully i didn't confuse you there but we're going to cover this again you'll see this a little bit later when jason uh walks through the tax center at tastyworks are the two different types of 1099s you'll receive okay so here what i have put together is a summary whether you're an individual or trading as a business where all of that trading information that comes from the 1099 is going to be reported so if you are an individual you're super familiar with your form 1040 and you will report your trading of your stock and equity options on the 89.49 and then if you've traded broad-based index funds that's going to flow through as a one-line item not the detail to your 67.81 and then if you did trade futures you're going to get a separate 1099 that is going to flow through to your 67.81 again as a one-line item okay so not as straightforward as you would think it would be um but hopefully that helps you bucketize where you need to uh report your trading now i'm going to jump into for a second if you're trading as a business but you choose not to make the 475 f election which we'll cover a little bit later but if you choose not to make that election depending upon what form your business takes whether it is a sole proprietorship or an a single member llc in either one of those cases it's going to go on your 10 40 and your expenses would be reported on your schedule c but your trading would still be reported on 89 49 and 67.81 um now if you create an entity there is if you're trading in a partnership or llc non you know multiple member llc then that's going to go on a 1065 if you are an s corp that's going to go on a 10 20 s and if you're a c corp that's going to go on at 10 20. so um but i'm i'm saying this because if you don't make that election the the highlight here is that the rest of it is going to flow the rest i should say all of your trading is going to flow through to the same type of forms but your business expenses would go on your schedule c if you're uh if you uh are a sole prop or a single member llc uh if you are an entity all of this is going to flow through and be part of um the other forms the other entity forms now if you do make the election for 475 f your trade your your forms for your entity structure is going to be just what i described but your trading is actually going to go on your 40 to 47 97 and we're going to talk about the tax treatment of that in a little bit here but the form is um i think laying out the forms was important so you sort of had a road map for where your trading gets reported to the irs here's a quick visual of what the tastyworks tax center looks like when you'll be downloading those two different 1099s again it's just more of a visual uh we're going to have jason cover this in more detail later in the segment but i wanted you to at least see that these are the forms that you'll pull down you'll download from tastyworks and then of course it'll flow through depending on the type of trader that you are as well as the products that you're trading okay now let's talk a little bit about tax treatment i've kept this in the same format of what type of trader you are is the column and then the rows are the different products you're trading and i'm not going to go through each one of these sections but what i will highlight is you know long term is basically over a year short term is less than a year and if you're trading the broad base index options or index funds or futures and options on futures those get this 60 40 treatment that's the regulated futures contracts the 1256 all those different titles remember all of that it gets treated as 60 long term and 40 short term now if you are trading as a business and you make the 475 f election and we'll talk about um what you need to do if that is something you decide is the right way to go for you and your trading then um we'll cover that a little bit later but all of your trading then is treated as ordinary okay ordinary gains and losses meaning all at short-term rates and the other difference that i'll highlight that's not really on this slide but it is that your trading your positions get mark to market at the end of the year which means that if even if you haven't closed out of the position you are going to get taxed on the unrealized gainer loss as of the end of the year so i highlight that because it is something that i think not everybody realizes what they're jumping into or how this is going to be uh reported so i want to talk about losses but i think what i'm going to do is i'm going to save that to the end when we bring tom dwyer on and he can walk through uh losses and what that looks like for an individual investor versus if you're trading as a business uh so we'll save that and put that in our hip pocket until the end of this segment all right next up we're going to cover actually how to make the 475f election and what you need to know so we've asked an outside tax attorney and cpa to join us for this part of the discussion please welcome tom dwyer with thomas j dwyer and associates here in chicago thanks for coming on tom happy to be here absolutely so i've known tom for a long time i've worked for his dad as my first job out of college at a large accounting firm and that is where i was first exposed to the trading world and taxes for traders and later his dad left that firm and started his own practice so this is his son who took the same path and is very well versed on this subject when i asked him if he wanted to talk through the 475f election his comment to me was he can do this in his sleep so tom please walk us through how to make the election um it's relatively straightforward really once you make the decision that you're going to do a 475 f election you just write a letter to the irs within 30 days of opening the account identifying the one you want to make the election and two which account you determine that you want to have that election applied to and that's it that's pretty easy that's way easier than all of the other forms that are that are talked about because they also talk about the um filing of form 3115 and they go into sort of this change in your accounting method um so what what and when does that even apply so the change of accounting method actually comes into play if you are going to change your accounting method so what we were just talking about is starting the 475 election uh its initial start so if that's what you're going to do from the get from the get-go uh the letter's fine but if you want to change out of the 475 or change your accounting method from cash to accrual that's when the 3115 comes into play okay perfect and there is more information in publication 550 is that right like if there's if somebody wants to really dive into this and go through it i think it's publication 550 at on the irs uh irs.gov website i'll take your word for it when it comes to publications and internal revenue codes i i got to look them up myself okay well that makes sense you didn't memorize it come on dang it sorry all right so next up um we are we are going to cover uh some questions and then we're going to bring tom dwyer back to cover some of the questions that you as viewers have had so we'll see tom in a couple more minutes okay let's talk about wash sales nobody really wants to talk about wash sales however it is something uh that i get a lot of questions about so i'm hoping to clear up some of those questions here uh so a wash sale occurs when you sell or trade securities at a loss at a loss within 30 days before or after the sale or before or after you close out that position so um the the the reason the irs put these rules in place is because there were traders that were trying to take advantage of of taking a loss reducing their tax liability for the year and sort of pushing it into the next year where they would close out of a position um take the loss on their return and then as the new year starts they re-establish that same position and the irs wanted to put some rules around that so that there were not um people that were gaming the system basically so so a again a wash sale occurs when you sell or trade a security at a loss within 30 days before or after the sale or closing of that position but the phrase that is in the irs code is acquiring substantially identical securities and because that is not specific enough um there's a lot of interpretation around that particular phrase now um what i can share with you and probably give you the quick answer on is in relation to options and because that's the question that comes up the most um and in relation to apex our clearing firm so if you are a tasty trader or you have an account at tastyworks what i can share with you is that apex are clearing from who is responsible to issue the 1099 to you uh the quick answer is is that their system will apply wash sale rules to the same security number and so what does that really mean well for the same strike but different expiration or the same expiration different stripes it will have different security numbers so you probably won't see as many wash sales as you might think um if you're trading options so okay so one of the things that i will highlight about option or about sorry about wash sales is just the fact that wash sales are generally a timing difference you will eventually get to take that loss um but it's it's again once you close out and you don't trade that security again for at least 30 days you'll be able to take that loss okay so hopefully that helps um the other thing that i've thrown up here is a uh again back to uh sort of our chart of showing what kind of trader you are and what type of products you're trading and as you'll note here um wash sales do not apply to broad-based index funds and they do not apply to futures and options on futures what they do apply to is an individual who is trading uh stock or equity options and in the case of if you are trading as a business but you have not elected the 475f election um you also would be in a scenario where you would need to um where you would need to uh take wash sales into account and again your broker will actually report these and aggregate these for you and they will you know from from an accuracy standpoint that would be accurate as long as that's the only trading account um that you have so okay now what i'm going to do is move on to the next segment uh of this which is trading as a business and so at this time what i'm going to do is i'm going to bring in another friendly face which is uh matt helmuth who is tasty trade cfo he's going to cover trading as a business welcome matt thanks for coming on the show so he's going to cover ultimately what qualifies you to trade as a business in the eyes of the irs all right ready to dive in matt i am ready okay the floor is yours okay all right so first off investor versus trader the irs says if the nature of your trading activities does not qualify you as a business you're considered an investor not a trader it doesn't matter whether you call yourself a trader or a day trader you are an investor does your trading qualify as a business there are certain requirements that you need to meet to qualify as a trader first you must be seeking profit from daily market movements your activity must be substantial and your activity must be carried on with continuity and regularity so some things you should consider the holding period of your positions should be no more than 31 days the frequency and dollar monitor trades you should be trading close to four days per week making roughly 720 trades per year and it should be few sporadic lapses in your trading throughout the year normal vacations personal time sick time you know days off like that are okay but you shouldn't be doing you know trade for a month or two take two months off and come back to it that that won't work the expectation is you should be making a living off your trading so the intent is for you to be running a separate trading business this isn't a hobby this is a way for you to make a living doesn't have to be your full-time living can be supplemental income but you have to be making a living off of or the intent has to be making a living off of your trading now the amount of time you spend trading you should be spending more than four hours a day almost every market day all the time you spend in activity counts so all the time you spend in trading activity counts towards this time with that includes the execution of orders research administration education and more next what type of business expenses are typical for a trader so a few examples listed on the slide here subscriptions data feeds your internet telecommunication computer costs technology expenses office supplies uh accounting legal professions professional fees when the amount of time you spend should be you know like i said almost daily you shouldn't be taking um you know a month or two off at a time and then coming back and training more that's more of a hobby you need to you can take vacations in personal time but but you should be active in this almost every day of the week as if it was a regular job i just want to uh sort of share with our viewers that the irs hasn't pinpointed each one of those requirements you're giving sort of um a broad sense of what seems to get them over the line right yes yes thank you they don't publish numbers or exact amount of hours or anything like that but matt's giving you some good context to look at yep thank you for pointing that out that's a good point so yes these are all you know they're they're some of these numbers come from prior cases right that that um went through the irs to to uh to argue their position but yes again there is no specific times or or numbers that are posted these are all kind of general rules and guidelines to follow so um thank you again for pointing that out so back to these expenses um you know the typical expenses you could think of subscriptions to any trade publications data feeds um your internet phone costs computer expenses other technology expenses software etc office supplies and then the typical professional fees your accountant or accounting help any legal fees or other professional fees you may use um one area that can tends to be somewhat of an aggressive area uh some uh taxpayers use as a as a way to get tax deductions is claiming a home office expense that's fine if you have a legitimate home office that's designated space that you use for operating trading business but a story i always reference with a previous tax client of mine back in the day when i did this kind of thing more regularly um he did a lot of work from his bed in his bedroom and so he tried to argue with me that the cost of his new bed was a deductible expense as his home office expense which you know is is not the case at all so that would be a hard one to convince the uh yes yes so but he tried he tried his best so true story but home office expense is okay if it's legitimate you can support it and you can you can show if you were audited that this space is used for your office it's not your kids playroom with the computer and then a desktop on it pretty much how i'm seeing right now so um okay so this next this next slide here goes over the forms to use i believe christie touched on most of these earlier but um just a a high-level quick kind of review on this if you're an individual or business and a business without the 47 475 f election um your your stock in equity options index options futures options they're all filed in the same forms 89 49 for stock and equity 67.81 for index index options and futures if you have the 475f election all of those get reported on form 4797 and then lastly here let's talk about schedule c so for sole proprietorships and single member llc's your this schedule c is where you'll report your business expenses um all other the income uh without the 475f will be reported on uh forms 89 49 and schedule d if you do have the 475f election the income is reported on part 2 of 47.97 so in the description here you just want to note that that's where the income for these related expenses is reported to help the irs kind of flow through and find where um where everything fits together yeah it helps them anything that you can do to sort of uh give them a roadmap to better understand where the income is where the expenses are and because this is a unique situation so that's awesome that's a really good overview of what a trader versus an investor um looks like so uh just remember because you do qualify doesn't necessarily mean you should elect the trader tech status the mark to market election or even go down the path of trading as a business it will really depend on your own personal tax situation okay then again that's like another disclaimer i throw out here i throw a bunch of disclaimers throughout this whole show so um so thank you so much for joining us matt thank you make sure that after making the 475f election with the irs that you email the accounts team at tastyworks so accounts at tastyworks.com stating that you would like to apply your section 475 f tax classification to your tastyworks account which must include your account number and a wet signature no digital signatures and the tax year in which it is effective for so this is important so that the 1099 that you get issued at the end of the year actually marks your positions to mark to market uh rather than receiving your regular gain and loss statement as you would if you were an investor so um and then lastly just a couple quick tips uh do not take this election lightly um this is something that talking to an accountant does make sense obviously an accountant that knows what is um you know what and how to do all of this but late elections are not allowed uh there aren't there are a couple of ways that you could maneuver that if you wanted to go down that path we're gonna actually touch on that later with tom dwyer again um keep your personal trading separate from your business trading so that's that's sort of 475 f in in a nutshell all right up next is jason chow we're going to bring him in from the tastyworks trade desk and he's going to cover the top five questions that get asked about taxes to the tastyworks support team and so hello jason thanks for joining us today hey good to be here let's do this yeah let's dive in i'm going to actually read through these questions and turn it over to you for the answers first up is and we covered this a little bit earlier um as well in this segment but what is rfc on my 1099b and how and where do i report that on my tax return is this duplicative isn't all or you know isn't all my futures trading on a separate 1099 b all right great so first rfc that's just abbreviation for regulated futures contracts and so you know if you trade futures outright futures any trade you know equity options uh you'll receive two 1099s and so the first one you'll get is a consolidated 1099 and that will show all your trades with you know your your equity trades and your equity options trades then you'll see on the bottom left corner of the uh if you did trade any uh section 1256 products such as spx ndx vixx just to name a few uh you'll see a little section on the bottom left corner of the consolidated uh totals page that says your regulated futures contracts and so that doesn't include your futures trades at all so if you did trade futures you also get a futurist 1099 b which includes any outright futures contracts that you've traded as well as options on futures so this can get a little confusing because you know you get this one tax form then you have this other tax form and in a nutshell all you have to do is just combine the total p l from the bottom left corner of the consolidated 1089 and i believe it's uh line 11 on the form on the 1099b for futures just take the sum of that and you have to report that on form 6781 which is an irs form for gains and losses from section 1256 contracts and so you have to just take that total uh gain or loss take the sum from the from both forms and just plop it there if you're using any sort of tax software uh there's gonna be a specific section where you report these products at so don't be alarmed if you import your trades and you're and you're saying wait how come my spx or vix um they have no there's no total whatsoever it's because they're reported in a separate area they're reported in a separate area and they don't require the detailed trades like they do for securities and equity options correct correct so just keep that in mind you know if you are if you are using if you are self filing using tax software that don't be alarmed you don't see any line items when you're importing that because these are section 1256 products which are reported differently number two where do i find the commissions and fees i paid so that i can report them on to the irs against my trading games so you'll you'll notice after the totals page of your uh 1099 that you'll you'll see your cost basis and your proceeds and as a matter of fact your commissions and fees are already factored into your total trade so if we were to provide you a total number of your commissions and fees you in fact would be double counting so in this case uh it's already factored into your total p l perfect so so there's nothing more they need to do it's already taken care of by their brokerage firm it's all added in okay number three why are some of my trades that i made on december 31st trade date not included in that same tax year reporting where'd they go what do i need to do differently for tax planning or trading at the end of the year so when it comes to so this is a really tricky thing because when it comes to the long positions and i'm talking about long equities and etfs as well as equity etf and options equity etf options as well is that loans are for tax reporting's sake are based on trade date however when it comes to short stock and short equity short equity options positions they're based on settlement so you have to be really careful on if you do plan on you know closing harvesting a profit or you're trying to or just take the loss for a specific tax here that admitted that if it includes a short leg or a short stock position that you make sure that the settlement occurs uh by december 31st uh so that means for the for example for this upcoming tax year for tax for tax year 2020 you're the last data close at short stock position would be tuesday december 29th because stock settles t plus two which means trade date plus two business plus two trading days which which would land it on december 31st long stock positions if you want to harvest a gain or loss uh you would do that on the on the december 31st because it's based on trade date and this is what and this is a really good one is that if you're doing any sort of equity or etf options including spreads because remember spread includes a long leg and a short leg that if you're going to close a spread out and you want to harvest the gain or loss it's got to be done in this case by wednesday december 30th because it will settle the next day on december 31st which is a thursday lastly when it comes to futures and futures options if you want to harvest a gain or loss you just have to do that by december 31st which is a thursday as well and uh and what makes those unique despite your launch despite being long or short is that again these are section 1256 products and they mark to market so one thing to keep in mind is if you do hold any position from 2020 to 2021 or if you're trading something from 20 uh 2019 to 2020 and you still held that position it's going to mark to market based on the closing mark and it's it's gonna look like a closed position because that's just in fact how these products are handled right anything that is a 1256 product or an rfc regulated futures contract falls under that category for the irs is mark to market and you will pick up unrealized gains or losses because of the mark to market for them and and so that's that's great thanks jason um one of the things that i think is also important to add to that is tastyworks did a nice job you know last year they they put a note out to you uh as a reminder about closing some of those in a timely fashion if you were trying to uh make sure that they were included for that tax year and so jason you guys will be doing that again this year right yeah we will and um if you you know i said a lot here just now so if you just forgot what i just said you can just go to our help center and just type in position reporting in the search bar or reporting and it'll be the first thing that pops up and all the dates that i just said are listed there as well number four on tastytrade they talk about cost basis reduction or keeping the dream alive by rolling can you explain both from a tax perspective so from a tax standpoint um when we talk about basis reduction i think the best example that we can use is uh selling um a short call against any your any sort of long stock position and so even though you're in the even though you're you know you're it goes with tasty trade principles of reducing basis the call that you actually sell against the stock is actually treated separately so yeah so you're indirectly reducing basis however when you look at it from you look at your text your your tax statements you're not going to see your cost bases on your stock reduced uh because you're the the profit or loss on your stock isn't going to be realized until you close out of the stock so assuming you still hold the stock position the only thing that you're going to see is the is the gain or loss that you made when you close the short call position uh when it and and so uh that's something to keep in mind is that yeah you are you are reducing your basis but it's not you're not reducing it directly so to speak um when it comes to rolling though so rolling gets a little tricky here because rolling you know you're keeping the dream alive for example for someone to put we're getting tested and we keep and we keep rolling it to the next month the next month the next month generally speaking if you're rolling you know a short put that's working against you you're gonna gonna incur a loss each time you roll it however and you know our you know from tasty trade principles the the thing is is to close out of all close out of that put eventually um for less than the total credit received and so assuming you are able to achieve that if you are able to close it for less than your total credit received um you will see a profit on that final leg that you close out and it should factor in to all those losses that you incurred so just keep that in mind even though you still even though in your head and you feel like you still are holding the position from a tax standpoint they're treated separately much like selling a call against uh long stock so keep that in mind especially if you're holding a rolled position from one tax year to another tax year right that's a and i'll just i'll reiterate that a little bit is when you are looking at reducing your cost basis you're sort of looking at the whole order chain right and when when you want to know whether you've made money or lost money over the course of that order chain and so when in the irs's eyes though every time you roll once you actually take off a position the that is considered a closed position but when rolling you're actually putting a new one on right and so they're actually viewing each one of those um actions as separate trades and positions uh so once you close out one in their eyes you are picking up the gainer loss so that's really helpful i think that a lot of questions come in both on the tasty trade side as well as the tasty works side um so that was good to run through that and number five what type of tax form should i expect from tastyworks if i am considered a foreign customer in the u.s and where can i get that form how do i know if my country and the u.s have a tax treaty yeah so this we get this a lot from our international customers uh so because you're not a because you're not a you know us-based customer you're not going to get a 1099 like any us-based customer here so the only thing that we provide international customers to help them reconcile any of their securities trades which is your uh you know equity etf shares as well as equine etf options is a is a tax worksheet and a year to date export file um so those both of those files are in csv format which are just spreadsheet format and they're both both can be found in our tax center just by logging in at your logging into your account at tastyworks.com uh however uh you are every customer regardless of international or not they do get a futurist 1099. so uh you'll when all that does is just sum up your total gain or loss for the calendar year um so if you do want to reconcile your trades because as a matter of fact each country it may not be like the us where we look at a tax here as january 1st december 31st and so based on when you're uh what your country's tax year is if you if it's for example june beginning of june to end of july then you'll have to use a cut you have to use a combination of your tax worksheet and a year-to-date file to reconcile your total performance all right well one of the things i can't stress enough is that there is a wealth of information that the help center on tastyworks.com provides uh for your taxes as as a trader so it's worth checking that out um anything else for us jason yeah i mean and i'm glad you that up with the with the help center too um and that's where um so each country does have your international customer uh you can you can find out whether your country has a tax treaty with the u.s by visiting your tax center as well just type in treaty in the in the search field as well and uh you'll see you'll find a link to the irs that will show all the list of countries that the u.s has tax treaties with otherwise the default withholding rate is 30 and that is only assessed on sources of income so you know like christy as you know like the irs for views income namely in sake of trading is like dividends uh dividends interest royalties so and so forth not the p l's from your trades so if you uh received any sort of dividend uh throughout the year and you and you discovered it withholding you'll get a uh form 1042 s which uh which will show that withhold rate and the amount perfect and there are a lot of links also within the help center around taxes so i mean you could spend probably a lot of time going through all of the information in there for all of these types of topics and more so thank you so much for joining us jason um i'm sure that if anybody wants to reach out to you or reach out to tastyworks um support tastyworks.com they may get jason so all right thank you so much we are now going to head into the questions that you as viewers have sent in um i'm going to bring tom dwyer back on to walk us through a few of those so tom welcome back already um we are yeah yeah so um a couple of quick ones if you are trading as a business as a sole proprietor is there a is there no way to write off your health insurance this is a question from a viewer um there is a way to write off your insurance if it is your truly your trade or business um then it should be subject to self-employment tax so that's how you're making your earnings so if you are subjecting your taxable uh your trading gains or losses and expenses to self-employment tax then you can deduct self-employment health insurance um long-term care premiums as well as potentially if you're on social security you can deduct your medicare part b's and part part d's but if you're taking the position that's not your trade of business that's more your investor then no you can't deduct them okay perfect is there any reason to actually create a an entity like if you have a c corp or um or an s corp or anything like that or uh or an llc or partnership is there any difference in the way that they would be able to take health insurance as a deduction if they're doing the business no the end of the structure itself wouldn't change it would be more the characteristics more how you classify yourself if you're an investor no if you're is that your trade or business and you're subjecting the earnings to self-employment tax then yes so regardless of your sole proprietor llc corporation the entity won't make the difference okay got it perfect okay so there are a lot of accountants that don't actually understand trading options and futures let alone helping make the decision on whether or not to to elect um you know the 475 or make the 475 f election what questions should viewers ask when they're interviewing accountants to make sure that they're hiring the right one well i think the easy one is you know have you ever done this before and a lot of accountants outside chicago or new york really haven't i mean we get a lot of business from other accountants that just when they come across this issue they flip it to us immediately just because it's very unique to um our location um so that'd be the first thing yes have you ever done this before and start peppering with more questions you know tell me why and let them talk for sure that's awesome okay so do you have any frequently asked questions that you can share with us that you you seem to get all the time um we do especially when people um start making this if it is their trade of business you know home office deduction you know everyone always says well it's got to be a red flag i don't want to do the home office i don't get audited by the irs and my first thing to them is always hey they have the form for a reason you know whether if you're in an office space or you're working from home you're expending money on behalf of earning earning money so the home office deduction is a very valid uh deduction and if you're at home and you're working especially during these times these pandemic times it's a legitimate deduction that's one question yeah well so so let me let me dive into that a little bit because we had matt helmuth who are our cfo he was on um earlier here in the show and he had brought up because he used to do taxes and one of his um one of his clients was trying to um deduct their bed because they have their office in their bedroom so that's not really a good deduction no it's not i mean you're really supposed to have you know a sectioned off area of your home you're supposed to do by square footage but the beds really i can't think of a good business use especially in the trading world for the bed um but you know i think in that situation uh you're better off sticking to the rules yes yes i totally agree okay so that's awesome what is the what is the form for the home office deduction i'm not even sure which one that is uh 8829 is the name of the forum okay perfect okay so let's do this because i know we're gonna run out of time here so um how about some tax planning tips do you have any tax planning tips for our viewers i do i mean you always for when it comes to the end of the year i say sometimes thanksgiving and end of the year it's always a good time to kind of look at where your income and expenses are to make sure you've got you know the correct amount of money set aside to pay your taxes um so that's that's one for sure thing that you've got to do because if you don't pay in um by the year end or by april 15th you could be subject to underpayment penalties which nowadays the interest rate is pretty low but it's not as low as your cd or your bank account savings account so you're better off paying in your taxes on a timely basis to avoid those underpayment penalties um and another thing too once you do those kind of plannings if you're having a good year and the question that people always ask about is where can i find more deductions outside of what you should be deducting but you can add on or later on retirement plans and there's a whole host of retirement plans that are offered out there but that's a good time of year to do it um most people are familiar with iras 401ks maybe even step by arrays those are relatively easy to set up but you can do more robust plans too if you want more than the 58 000 deduction there are plans out there that allow you to do it that's awesome so one of the um one of the questions that came in also from a viewer is around estimated tax payments and so while they are they are in the category of an investor they were asking you know do i still need to make some sort of estimated payment they get a w-2 um do they need to make estimated like estimated payments what's the general rule for that oh everyone loves this answer it's gonna depend i mean so you really have to look at the income you know in the withholding and where you're at because regardless of your source of income you're supposed to have about 90 percent of your taxes paid in before the end of the year so if you're a wage earner and you happen to be you know doing some day trading or investing if you're doing you know okay trading wise and but you're withholding from your wages covers that you're fine but if you're having a real good year um then if you don't have 90 of your taxes paid and you will get hit with it under payment penalty so someone like that that's a you know good example especially now with trading being readily available to most people i suppose it was about 20 years ago i'll ask clients to show me their w-2 show me the withholdings let's see where you're at see where your trading games are at and let's actually figure it out and then we go from there then all the other planning things come into place if you have to make estimated payments we'll let you know what that is and also too if you have a really good year we can talk about other options available to minimize your tax as well perfect okay so um i want to also make sure that we have an opportunity to cover a couple of other things in regard to um in regard to losses i think you know this year has been quite a challenge on multiple fronts but let's let's cover um let's cover losses as an individual whether it's an individual what those capital loss limitations are if you are trading as a business without the 475 election and then if you are trading as a business with the 475 election can you run through what those losses and carry back and carry forwards um look like for uh for these different scenarios oh man there's a lot okay so the the basic starting point is that if you're having if you're trading you have short-term long-term losses those losses are limited to three grand per year that's if you're single or married finally joint uh if you're doing married flying separate you're limited to 1500 bucks per year so those capital losses um get carried forward and only carried forward um until actually you can carry forward the day of that um but they'll only be offset by other trading gains in the next years um but like you were talking about with the 475 election that's when we have a conversation with people if you're doing nothing but short-term trading just getting in and out of you know equity positions or option positions um then if you're never going to hold it for longer than a year there's no reason not to make the 475 election because of the loss limitation issue i mean god forbid you lose money which people can do you don't want to be limited to that three thousand dollar loss because that's really you're burning a good tax asset now people say how do you think of a loss as an asset it really is because it does generate you know or does lower your tax obligation and potentially gives you you know a larger refund um so that's one type of cap losses issue the if you start trading regulated futures contracts or now this is one code i do know 1256 contracts uh so if you're trading futures and you have a loss there's actually unique provision with the futures contracts the guys that board trade put in back in the 70s that if you have losses you can actually take those losses back three years now you can only offset them against other futures income but that could be significant if you've been trading for a long period of time and go back and get back some refunds and obviously time value money if the refunds are significant enough uh something you want to do um and then the other types of losses they're involved in net operating losses so if you're actually considering yourself to be a trader this is your trader this is your trade or profession um now with the new cares act you can actually do what's called a net operating loss you can go back five years and generate refunds potentially or you can just carry it forward so there's a whole host of um potential issues or tools i should say that you dispose of to potentially you know generate more refunds in prior years if they uh decide to trade as a business let's say they're a sole proprietor but they don't make that election right so they're filing their 10 40 their schedule c they're they're using the 89 49 they're using the the um uh 6781 and they're still limited on the three the three thousand dollars um without that election right correct yeah right you need to make that election timely otherwise you're stuck but there is a loophole um in the 475 uh section that if you want to make a late election you can do that if you're filing an entity you return for the first time so we're talking earlier how entities doesn't make a difference in this situation it does so in other words nobody ever calls me when they're making money because you know they've got a capital gains they're not having lost limitations they're doing just fine fine some lasting will get the phone calls when they have lost money because you're out the cash but now you're not really getting the associated you know tax deduction to go with it so the way to get around that let's take a husband and wife situation the husband was the one that lost the doe we actually can set up what's called you know a general partnership and that's a first year filing so we can actually make that election by april 15th of the next year so guess what you get the ability of hindsight to go back and say we've got losses i want the election i don't want the limitation you can do that and that works all the time okay that's that's actually really helpful because i think that um most people you know feel like i i missed the the deadline and there's absolutely nothing i can do you you're providing another option for that all right well thank you so much is there anything else you want to add before we we wrap it up no i think we covered a lot of topics there's a lot of stuff there okay perfect if somebody has a question if they want to reach out to you how could they get a hold of you tom uh probably the easiest way to get a hold of me is uh by email my email address is tjd dash jr at tjdwyerlaw.com so shoot me an email and happen i will get back to you that is awesome thanks so much for joining us and sharing your wonderful you know happiness for traders wisdom all right sounds good okay take care okay we are nearing the end the last section is the tastyworks tax center and so we're actually going to tee up a video here for you to watch and jason ciao once again is going to walk you through enjoy he made it through another year of trading but now it's tax time only non-qualified accounts which is just a fancy term for a non-ira account will get a consolidated 1099 if it had one or more of the following a closing order an expired position took part in a corporate action such as a tender offer received at least ten dollars in dividends or distributions received at least ten dollars in interest income or received at least ten dollars in original issue discount income or received miscellaneous income such as a royalty or a substitute payment first let's see which tax forms you can expect based on your trading activity if you only traded equities which are stocks and etfs as well as equity options then you'll receive a consolidated 1099 from our clearing firm if you only traded futures then you'll only receive a substitute 1099 statement also known as a futurist 1099-b however if you traded equities and futures then you can expect both before we get started you'll notice that this header appears on every page the account number and owner will list as well as the last four digits of the tax id also if your 1099 had a correction then the reissue date will also list now let's get into this the table of contents is the first page this will let you know which 1099s are part of your consolidated forms included 1099s and the page number list below details and the forms not included will list below the year-end message after the table of contents you'll see a summarized version of your included 1099s based on your account activity next the form 1099-b's total summary page is probably where you'll spend most your time since this list your total gain or loss that you will report on schedule d capital gains and losses that said your total p ls are split into four categories short term capital gains long-term capital gains a known term which typically affects positions that were recently transferred to tastyworks and regulated futures contracts or in this case section 1256 options contracts such as spx ndx and vix however if you traded futures then your total gain or loss will list in your substitute 1099 future statement also known as your form 1099-b futures statement following the total summary page this is where you can see a profit or loss from all your trades this section is also known as form 8949 and in short these are the raw numbers that make up your total summary page this section is also split up by your short-term long-term and unknown term as well as your regulated futures contracts first let's go over stock and etf share reporting a gain will list as a whole number and a loss will list in parentheses you can quickly spot any short stock positions by referring to the additional information column one thing to be aware of are assignments and exercises the credit received or debit paid will respectively reflect in the proceeds and cost bases of the shares now let's take a look at how equity options are handled just like stock and etf share reporting the gain from an option well this is a whole number and a loss in parentheses you can quickly spot expired options positions by referring to the additional information column when an option expires worthless zeros will appear in the proceeds for a long position and zeros for the cost spaces for short positions if you traded any cash settled index options then the profit or loss for each leg will report in this section following your equity and equity options trades here you can find your aggregate profit or loss which is the number that you need to report remember if you did not close out of your cash settled index options position and carried them into the new year then they are marked to market which means the profit or loss based on the closing mark at the end of the year will reflect and your aggregate profit or loss also keep in mind that your total profit or loss from these products are reported on form 6781 contracts and straddles and not on your schedule d that you use to report equity and equity options trades that said if you traded futures then this is one half of your section 1256 reporting which we'll go over on the next page when you trade futures or options on futures you will receive a substitute 1099 feature statement from our futures commission merchant fc stone via apex clearing your futures trading performance is broken down by month your gain or loss includes outright futures options on futures as well as any futures positions held into the new year that were marked to market the number you need to report on form 6781 is line 11 your aggregate profit or loss you will report your profit or loss from futures trading and section 1256 options contracts on form 6781 whether you are filing electronically with tax software or the old-fashioned way keep a lookout for this form original issue discounts generally refer to fixed income products such as a bond purchase below their face value although we don't support fixed income trading at tastyworks any fixed income products transferred and held at our clearing firm may generate a form 1099 oid fees and charges listed in your consolidated 1099 commonly include margin debit interest adr fees and any owed dividends from short stock positions however commissions and fees are not listed because they are already factored into each position's cost basis and proceeds dividend payments from a long stock or etf position will report on your 1099 div dividends are either classified as qualified or non-qualified based on your holding period interest payments from idle cash as well as the ust bills held to maturity will list on your 1099 int any miscellaneous income will list on your 1099 misc some examples of miscellaneous income are a royalty payment from an lp or dividend payment from a long stock or etf position in a margin account after your 1099s you will see your investment details which is strictly informational all this lays out are all of your opening and closing transactions depending on how active you were your details can span over many pages despite the long acronym this section is made up of two parts and list positions that are subject to additional reporting some common positions include commodity or currency-based etfs as the second part of the income details any underlying subject to a written statement will list here and on its own page generally this affects underlying subject to investment expenses charged by the investment company i know we went through a lot and at first glance taxes may look daunting however you can learn more about your 1099s at your own pace by downloading our consolidated 1099 tax form guide in our help center the guide goes over each page and dissects at 1099 in detail you can find this guide by going to tastyworks.com and clicking help center once in our help center scroll down to the tax center category and select tax form guides there the first link will take you to the consolidated 1099 guide that concludes our taxes for traders 2020. thank you so much for joining us tonight and also big shout out to matt helmuth and jason chao and tom dwyer for sharing their wisdom with us so i am just going to leave you with a couple of ways to get in touch with us if you do have additional questions we will help wherever we can taxes tastytrade.com or of course support tastyworks.com so please reach out if we can help you with anything and good luck trading [Music]

Channel: tastytrade

Views: 17,605

Rating: 4.9652777 out of 5

Keywords: IRS, Internal Revenue Service, tax return, stock, futures, options, trader, trading tax rules, wash sales, broad based index, form 1099, LLC, trading business, wash sales rules, Mtm election, mtm trader, accounts, 475f, foreign account taxes, tax planning

Id: nIa0AKvAP8E

Length: 67min 56sec (4076 seconds)

Published: Wed Oct 14 2020

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