What to Know if you Want to Start a Trading Business?

Trading can be a great way to build up a significant amount of money, but like anything that is potentially lucrative in life, it requires hard work, dedication and planning.

Many people who want to take their trading seriously decide to set up as a trading business. This can be a great way to gain access to a range of benefits that many individual investors are unable to access, with tax advantages being one of the most important.

Where do you start? Catching up on the latest trading industry analysis is a good place, and once you’ve familiarized yourself with the territory you are going to want to get started.

These tips can put you on the right track.

Setting up your trading entity

A popular way of setting up a trading business is by creating a limited liability company (LLC) in your state of residence. Of course, tax laws can vary, according to your state, but not to the extent that they would make a significant difference to your business.

There is no need to come up with an elaborate name as the reason that you are creating an LLC is essentially to keep your trading and personal investments separate, in order to limit your potential liability. To set up your LLC, you will have to put together an “articles of organization” document, which will contain essential information, including the name of your business, its purpose, the location of your business and the name of associated people.

Of course, as in the majority of cases, the only member of your business will be you alone. If you are looking for definitive advice on establishing an LLC, then head to the IRS.gov site and check out their advice.

Employee Identification Number

You can send off for an Employee Identification Number (EIN) once you have set up your LLC. This number can be used on trading accounts and tax forms, and the Inland Revenue Service will use it to identify your business as distinct from your social security number. If you have any questions over the EIN, then it is a good idea to consult a licensed tax professional, who can take you through the process. However, before you seek any advice, make sure that the person you are consulting has experience of tax accounting for traders.

Can you claim trader tax status?

The answer to this question is no, unfortunately, though the IRS has provided criteria to determine if someone is eligible. Essentially, to qualify for trader tax status, your trading must be “substantial, regular, frequent and continuous”. Your trading must also be based on profiting from short-term changes in the market rather than long-term stock holdings.

There is obviously a degree of ambiguity in this, but if you are involved in day trading and you have no other significant sources of income, then there is a good chance that you will qualify.

Mark-to-market (MTM) accounting

This is the procedure that you have to go through at the end of the year, and involves marking all of your current positions to market prices. It does not apply to business expenses, and there are different tax calculations depending on whether you are trading securities, or commodities and futures.

Losing years

One of the advantages of setting up a trading company is that business taxpayers can benefit from net operating loss tax laws, which enable you to carry business losses back or forwards. This means that if you do well in one year but follow that with a losing year, then you can carry back those losses and earn significant refunds.

Expenses

Establishing a trading business offers many other benefits, including the opportunity to deduct health insurance premiums, set up retirement plans, and also to write off extra expenses, including education materials and computer equipment.

As any gains and losses that you experience are considered to be ordinary gains and losses when you choose MTM accounting, you can deduct in full against tax return income. This ability to deduct expenses for home office and education, and depreciation on IT and office equipment, are benefits that you won’t be able to take advantage of as an individual trader.

It may not seem like a natural step to turn your trading into a business, but if you are serious about making a significant amount of money from trading, then there are many benefits to this move, and it is definitely worth considering as a strategic option.

FG Editorial Team
The Founder's Guide Team - Asian Associates with dynamic elements out to make a change.Thank you for visiting our site! If you do have any questions or inquiry, feel free to contact us through our links and please don't forget to follow our social media accounts. It would be our pleasure to help you in any way we can. Always Remember: "Proceed to Succeed". Hoping to hear from you soon!

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