Q&A: Can I turn my personal investment account into a business and deduct items such as PC & subscriptions?
Question by James A: Can I turn my personal investment account into a business and deduct items such as PC & subscriptions?
I was thinking of ways in which to reduce my tax liability in future years. I currently max out my Roth IRA. I also have a personal investment account. In this account I make frequent trades and thus pay the regular income tax rate on my gains. Can the investment account be treated as a separate business? After all, there is definitely a profit-making motive.
If it was classified as a business, would I be able to deduct computer equipment, internet bills, home (office) depreciation, newsletter subscriptions, etc?
Answer by Sadcat
To be classified as being in the business of trading, you need to make an election under section 475(f) of the Internal Revenue Code to be treated as a trader. The election is made on Form 3115, application for change in accounting method. You have to file the form by April 15 of the year in in which you wish to be classified as a trader. Once you file, you are stuck with the consequences.
That’s the procedure. But the real issues are whether you really qualify to make the election and whether it would really benefit you.
If you elect under 475(f), you have to use “mark to market” accounting. That means that regardless of what you hold on December 31 of any year, you pretend that you sold all your securities and re-bought them on January 1 of the next year. You never get any long term gains or losses and the lower tax rates associated with them. You can deduct business expenses in your trading business, but if you plan on holding securities for longer periods of time, that’s likely not much of a benefit to you. You also lose any chance at carrying over up to $ 3000 of losses in one year to later years.
Do you qualify? Court cases are all over the map on this issue. To be safe, you have to trade at least 1000 times a year (buying or selling), you have to hold almost all your positions for 30 days or less, and trading has to be your principal activity for the production of income. If you hold another full or even part time job while continuing to trade, the IRS is likely to say that you don’t qualify as a trader. If you file the election, get audited, and the IRS determines you were never a trader, the results can be disastrous.
If you qualify, try it. But get professional help first. But very few people qualify.
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