Resolved: Smarter on Taxes when Trading

TK All-Star guest Jim Crimmins offers a few tax tips to get you ready for 2009.

It’s New Year’s resolution time – and pretty soon it’ll be tax time. In fact, April is the month many traders and investors spend slapping themselves ruefully on the forehead, asking: why didn’t I get a handle on all this tax stuff sooner?

Never fear! Better tax management is easy to squeeze into your New Year’s resolution list – easier than flossing daily or getting a good night’s sleep when late-night movies beckon. Here’s a list of good habits you can get into now to make life easier come April 2009:

1.     Set up your positions in TradeKing’s Maxit Tax Manager. Login to your TK brokerage account, then head over to Accounts > Maxit Tax Manager. Your positions should be loaded automatically; if you’ve transferred in positions from another brokerage, you’ll need to add the cost basis information.

Now choose your tax accounting method under the Preferences tab. TK defaults to a tax method known as FIFO, “first in, first out”. You might prefer LIFO (“last in, first out”) to take more short-term gains / losses. Or just leave that to Maxit entirely by choosing MinTax; that setting chooses the optimal tax accounting method for each transaction automatically.

That’s it! Just check into Maxit a few times in the year and see how your chosen accounting method is working. Head over to the Realized Gain / Loss tab to see your activity and its tax implications. You can change gears for transactions going forward by switching accounting methods in Preferences. (Note the IRS does not allow you to switching accounting methods on transactions that are already past, but you can change your accounting for transactions from that point forward.)

(And why not ask your accountant what he or she recommends? A quick chat in June and October might really make a difference come year’s end.)

2.     Watch for wash sales. A wash sale refers to the buying and selling of “substantially the same security” during a 61-day period or less (30 days on each side of the trade). As the name implies, these kinds of transactions are a “wash” – some activity happened, but you wound up with essentially the same position as before.

Since you can’t claim losses generated by wash sales for tax purposes, it’s worth keeping an eye on them. Maxit flags all wash sales as they happen in your TK transaction ledger and Realized Gain / Loss tab, so you can plan for them accordingly (and save your tax accountant a ton of time tallying them manually).

Here are a couple of good reads for brushing up on wash sales:

http://www.irs.gov/publications/p550/ch04.html

http://www.fairmark.com/capgain/wash/

http://www.smartmoney.com/personal-finance/taxes/a-sneaky-new-twist-on-the-wash-sale-rules-23611/

http://www.forbes.com/home/2008/12/22/wash-sale-rule-pf-ii-in_jd_1222taxes_inl.html

3.     Consider establishing yourself as a trading business. If you are an active trader and seek to profit from market movements, not just dividends or capital appreciation, it might make sense to set yourself up as a trading business for tax purposes.

You should definitely get a tax professional involved in that decision. Becoming a professional trader isn’t necessarily as clear-cut as other forms of self-employment income. A tax professional can help you establish your trading business on surer footing and inform you of the rules that apply to your situation.   

Start by checking out my recent TradeKing webinar on this subject – it’ll get you thinking and make great fodder for discussion with your accountant.

4.     Devote this week’s lunch hours to tax education. It doesn’t take a lot of time to get up-to-speed on tax matters, but it does take a little dedication and the right resources. Work your way through this list at lunch hour, and you’ll come out the other side much more knowledgeable about taxes for traders:

·         Check out my recent TradeKing webinar.

·         Head over to TradersAccounting.com and complete a questionnaire. You’ll receive a free 40-page report, customized to your situation, plus general tax tips geared to traders and investors.

·         Dig into the Tax Guy at Smartmoney.com. You can learn plenty just by poking around.

Also, be on the look out for future tax webinars scheduled for February 3, February 24, and March 10. Details coming soon. And feel free to send me comments or questions via email at jcrimmins@tradersaccounting.com.

Regards,

--Jim Crimmins

Traders Accounting

All-Star Commentator

Read previous TradeKing All-Star blogs.

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