Are you a trader in the United States
who banked huge Lamborghini money
from stocks, cryptos, or options last year?
Great, if you did then brace yourselves.
April is going to be quite dreadful.
Because...
Taxes!
(screen clicking)
(logo whooshing)
Now, I know some of you might be saying,
"Oh my gosh, eh, what do you know about the taxes
in the United States or the IRS?
You're stuck up there
in the Canadian igloos,
drinking maple syrup.
You're not even American,
and you are absolutely right
about the maple syrup too.
And that's why in this video
I've been invited a special guest,
a TraderTaxCPA, in the United States, Brian Rivera.
- Hey everybody. Thanks for having me.
- I'm going to be asking Brian,
a lot of tax questions for all of you traders
in the United States
on some key topics,
such as how to qualify for trader tax status
and avoid wash sale rules.
How can a trader maximize tax deductions and form an LLC
to save even more money on taxes
and many, many other topics.
So if you want to learn
how to keep more trading profits in your pocket,
make sure to watch the entire video,
and don't forget to drop a like at the bottom of the video.
It's absolutely free to do so
unlike paying for taxes.
Hi, Brian, thanks for joining me today.
And Brian, you're actually the first guest we ever had
on the Humbled Trader channel here.
- Thanks for having me.
That's awesome. I feel honored. (chuckles)
- Yeah.
And I'm so glad that I found you,
I found your channel,
as a CPA in a state to be able to come in
and talk about taxes as a professional,
and to help traders and think about how to save on taxes.
- Absolutely. Yeah.
So that's definitely something
that I've been doing since 2014.
And so anyway, I can add value to the trading community.
I'm always for that.
- So really quick, just to,
I'm sure this is the top of a question for everyone
all the traders in the states thinking
what is the best way for active traders in the US,
whether they're swing traders or day traders
to save on taxes?
- Yeah, that's a great question.
And so, you know, a lot of times
what'll happen is
people will jump in the stock market,
they'll either have early success or they won't,
and they'll think about taxes as an afterthought.
And so usually, you know, step one
that I always recommend is that
they understand what it means to be an active trader
in securities.
And that's just because the IRS has guidance out there
that if you qualify, then you'll be able to strategize.
And two of the things that you'll be able to do is,
one is you'll have the ability to write off
your business expenses.
So a lot of times new traders getting into this profession
will experience some costs
like education, software fees, locate fees, stuff like that.
And then the second piece of that
is mark-to-market accounting,
which we'll probably touch on here shortly.
- Okay.
So is this qualification
'cause I've been hearing a lot of traders I trade with
talking about this trader tax status.
Could you talk a little bit about that
and how exactly do you qualify for it?
- Yeah. So trader tax status is basically,
it's a baseline of how you know if you qualify.
So the IRS,
if you actually read the guidance,
it's IRS tax topic 429,
and if you actually read it, it doesn't make any sense.
And so how we've tried to simplify it within our firm
and this is what all of our associates do
when we get a tax client in or a trader client
is we run them through something called the behave test.
I just love acronyms.
And so B stands for business expenses customary to a trader.
So what we'll do is we'll look to make sure that,
hey, are your expenses reasonable and necessary?
And does this align with what's acceptable in the industry?
Secondly, we'll look at,
E stands for equipment.
So that's basically equipment used in trading.
And so, a lot of times traders
trade from a laptop, cell phone,
they get held to the point
where they have multiple, multiple monitors.
And usually, you know, I see that
for the scalp traders especially.
H stands for the hours in the market.
And so usually as a trader,
you gotta have at least four hours in the market.
With B, H, E, A stands for average holding periods,
average holding periods is basically
your holding periods of the stocks that you're holding
should not exceed 31 days.
And that's just because we wanna see
regularity and continuity.
The V stands for volume.
So the volume of your trades needs to be at least 720.
So how we look at a trade is based on transaction.
So if you bought 500 shares of Tesla,
you sold 500 shares.
That's two trades.
Now, if you scale in,
let's say you break it up into orders of a hundred,
then all the way up to 500
that would be five on the buy and then five on the sell.
And then the last piece is E,
which is the extent at what you trade.
And so what that means is
basically you gotta have a trade
on at least 75% of open market days.
So the stock market is open 252 days on the year.
So 75% of that would be 189.
If you meet all those criteria,
you're basically there in qualifying as a trader.
- So that means if I'm in the US,
and I qualify for trader tax status,
then I can write off all the trading deductions.
- Correct.
As long as those deductions are reasonable and necessary,
then yes, you can write off those expenses
against your net short term trading gains.
- And that also means if I don't qualify
then I cannot write off any of the expenses.
And the losses are only capped at 3,000, right, per year?
- Yeah, that's partially correct.
So if you don't qualify
as a trader in security or active trader,
then you won't be able to ride off your business expenses.
And then also if you don't qualify as a trader
then you're in what's called capital loss territory.
So, let's say you lost $10,000.
Then you can write off 3000 against your other income,
and you have a capital loss carry forward of $7,000.
Now, the capital loss criteria really is only applicable
if you are not a mark-to-market trader.
And so one of the conditions
of being a mark-to-market trader is,
first is, you have to qualify for trader status.
So you have to get that out of the way.
And then the second step is
you gotta make sure you have an election filed
because you could qualify as a trader,
but not have an election.
And in that situation,
you're still stuck with $3,000 in losses.
- This is only the second question in
and my head is like ready to explode. (laughs)
Oh my god, trader tax is so complicated.
So we just talked about qualifying for trader tax status.
And I think that's great for traders
and being able to optimize more deductions.
But what about forming an LLC?
Because I do see a lot of traders asking me that
in a comment section,
when do you think would be a good time
for active traders to form LLC?
And why would that be beneficial
for certain high-income traders?
- You actually partially answered that question.
So a good time for a trader
to start thinking about an LLC is,
there's a couple situations,
but one is you're looking for additional deductions
that you can't get as an individual.
And an example of those two would be
the ability to contribute to a retirement plans,
specifically a solo 401k,
which for 2022 allows $61,000 in contributions.
The second piece is
the ability to write off your health insurance.
So those are two deductions you can't get
if you're not inside of an S corporation
or an LLC tax as an S Corp.
So that would be two reasons why,
and there's other things
that we can also do inside of those entities.
But I don't wanna confuse you
for the purposes of this question.
Yep.
- Okay. (laughs)
Thank you for helping me not explode my head.
And another question I hear
a lot of traders ask me is wash sales,
and they're saying,
it's like a nightmare to track it.
What's the advice you would give as a CPA to
for traders who navigate around this?
- Yeah, that's a great question.
And you know, the last two years,
I would say there's been a boom in the retail market.
And a lot of people got a rude awakening
on what this wash sale rule means.
And so very high level, what a wash sale is,
is anytime you take a loss on a trade,
and you turn around and buy that same stock
or trade that same stock in a 30 day window,
IRS basically says,
hey, that loss is disallowed for tax purposes.
And it gets added to the cost basis of your very next trade.
And so it's normally not a problem,
if you're a trader that
let's say, you don't trade the same names over and over,
but if you're a momentum trader,
let's say, you trade Tesla every single day
or you're gonna flag wash sales all across the board.
So as a trader, how you keep yourself safe is two ways.
First way is,
if you're not a mark-to-market trader
then you need to sit out of that name
for at least 31 days.
The window is 30 days,
but I say 31 days to be safe.
So either a, you stop trading that name
in the month of December
to let the wash sale period cool off,
or you don't touch that name in the month of January
because wash sales are 30 day before and 30 days after.
The second way you can protect yourself
is you can elect what's called
section 475 mark-to-market accounting.
And so what mark-to-market accounting does is
it changes the nature of your tax reporting.
So now you no longer have wash sales
and your gain and loss
is realized as of the end of the trading day.
- And how hard is it to elect
that mark-to-market accounting.
- It's not hard at all.
There's two ways to do it.
So the first way is,
let's say you're a trader
and you trade under your social security number
as an individual.
Well, you have to make the election ahead of time.
So we're in 2022.
And so if you wanna be a mark-to-market trader for 2022,
you need to have an election statement filed
with your tax return by April 15th,
you're just notifying the IRS.
You're just telling 'em,
hey, I qualify as a trader.
I'm electing mark-to-market this year.
You're gonna sign that,
and file it with your tax return or extension
by April 15th, you're gonna send it off.
Once you do that, you'll contact your broker.
You'll say, hey E*TRADE, hey, Fidelity,
whoever you trade at.
And you'll say, hey, I qualify as a trader.
Please update my tax reporting.
That's all you gotta do for this year.
Then when you go to file your 2022 tax return,
what you're gonna do is,
you're gonna complete that process by filing
what's called a Form 3115, Application
with your 2022 return
that gets filed next year.
When you file that with your tax return,
and then you send another copy to the IRS national office.
That's all you gotta do.
Now, if you're a brand new taxpayer,
let's say you created a new entity in February.
Let's say you decided, you know what, I'm killing it.
I'm crushing it. I'm ready to be an LLC.
Well, you could elect it the day the LLC is open.
All you gotta do is you put a memo
in your corporate records,
you sign it and you file it away.
And when you open up your brokerage account under your LLC
you just tell the broker,
hey, I'm a mark-to-market trader,
and you're set up from day one,
and you don't have to do everything that I just said.
You're good to go with the brand new entity.
- So traders remember what Brian just said.
April 15th of this year, right?
Is the deadline to elect mark-to-market accounting.
- Exactly.
- Okay. Very important.
Because it would suck
to not be able to trade the same tickers within 30 days.
And also does that mean
if I elect mark-to-market accounting,
would that allow me to kinda recognize
all the losses I took prior to that?
- Yeah.
So unfortunately the way the mark-to-market election works,
it isn't on a go forward basis.
And so anything that happened up to the year
that you filed mark-to-market,
unfortunately you can't retroactively adjust those losses.
So if you remember how I mentioned earlier,
there's something called capital lost treatment.
So let's say you were day trading for three years,
and you accumulated a hundred thousand
in day trading losses and you decide,
hey, I just learned about this mark-to-market.
I wanna elect it.
When you elect it,
it's not gonna change the hundred thousand dollars losses
that you had.
You're gonna recognize $3,000 every single year
until that's used up.
So a lot of times what I'll tell traders is,
if they have that market tuition and they have big losses,
what you wanna do is,
you wanna get out of that capital loss hole first
because that's a tax benefit to you.
Although you have losses,
it's also gonna offset all your future income.
Then once the losses are used up
then you will elect me mark-to-market
and you're protected going forward.
- Brian, let's say I made a killing
trading GameStop, AMC in 2021
with all the WallStreetBets hype and all the movements.
I'm sure a lot of traders made a ton of money.
And if I want to pay no taxes, how do I do that?
- (laughs) You know, I would say that,
with the tax you're already being over,
it's really hard to tax plan after the fact.
And so usually tax strategy, tax planning happens
outside of tax filing seizing.
And so that's why it's really important
you always maintain a relationship
with your accountant or your CPA firm.
Yeah. And then the thing is trading is it's unpredictable.
So one quarter you can have a great year or a great quarter.
Then the second quarter, it cannot be as good.
So it's very volatile, just like a stock chart.
But at the end of the year,
you might say, whoa, man take a step back.
It's like, man, I did a really good job,
but as long as you can catch that
before we cross the end of the year,
you know, then there's still some stuff
that we can do for you.
But if you wait until it's time to file your taxes
that is not the time to tax plan.
- Is that why a lot of baller traders
move to Puerto Rico to pay less tax?
- Yeah.
So Puerto Rico has probably some of the best regulation
for traders and investors.
So I have a lot of clients that have gone there.
I have a lot of clients that have came back
after going there and making a killing.
And the reason behind that is Puerto Rico has a statute
which is called Act 60.
And basically what Act 60 is,
it's you establishing permanent residency in Puerto Rico.
And there's a couple other, what's the word?
Standards or regulations that you need to hit.
But as soon as you establish permanent residency
from that point forward,
you pay 0% on all of your capital gains.
So if you're somebody who is mobile,
somebody who is not attached to your state
and you're free to go wherever,
I highly recommend going to Puerto Rico,
because that is the ultimate tax strategy in that,
any money you make from investing
is gonna be taxed at a big fat zero.
- Zero?
- 0%. Yes.
- 0%.
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As a CPA, do you get a lot of people complain
or I guess rant to you about,
oh, they're making a lot of money,
but it feels like the government is taking everything away.
And how would you respond to that?
- Yeah, so, you know, unfortunately
that is a very popular complaint that I receive.
And so before we try to address the problem is,
I always like to level set
and I always just say, hey man,
for every trader that's banking,
there could be 5 or 10
that would gladly switch positions with you.
So if you're in a position
where you actually have to pay tax,
consider yourself blessed.
And once you kind of have that mindset,
it's like, man, you know, I'm actually blessed.
I can work in my underwear.
I can day trade in my office.
I can do all these things.
You're blessed. Right?
And then from there it's like, okay,
now let's find a special specialized firm like us
to see what can we do
to start chipping away at that money
to make sure that
you're not giving uncle Sam more than you need to,
but it's an honor to pay tax.
It's just, you know, what can we do
to bring that number down?
- Yeah, I agree with that
because it means if you're having to pay
a lot of taxes means you are at a higher tax bracket.
I would much rather be making $400,000
and have to pay, let's say $200,000 in taxes
than making 50 grand
and only have to pay, let's say $10,000 in taxes.
I think we have to put everything into perspective.
- Right?
- Right. Absolutely.
Agree. A hundred percent.
- Thank you Brian for coming in today,
and answering so many of these frequently asked questions
from traders.
- Absolutely.
These questions were hard,
but it's been my pleasure to answer those.
And for anybody else
that's looking for more content around entrepreneurship,
personal finance, day trading, investing,
feel free to check out my YouTube channel,
Brian Rivera, CPA,
and we'll catch you at the next video.
- Thanks Brian. Have a good one.
Traders, if you got anything from this video,
if you learned about how to save Lamborghini money,
then make sure to drop a like
at the bottom of the video.
It really took Brian and I a lot of time and planning
to make this happen.
So feel free to check out Brian's YouTube channel
for even more resources on taxes.
Thank you guys so much for watching as always.
I'm the Humbled Trader,
and I'll see you guys next time.