Jump to content

Welcome to the new Traders Laboratory! Please bear with us as we finish the migration over the next few days. If you find any issues, want to leave feedback, get in touch with us, or offer suggestions please post to the Support forum here.

  • Welcome Guests

    Welcome. You are currently viewing the forum as a guest which does not give you access to all the great features at Traders Laboratory such as interacting with members, access to all forums, downloading attachments, and eligibility to win free giveaways. Registration is fast, simple and absolutely free. Create a FREE Traders Laboratory account here.

TimRacette

How to Setup Your Trading Business

Recommended Posts

I’m sure you’ve heard the saying “treat trading like a business.” Setting up a trading entity correctly is an important step if you are (or plan to be) a full-time trader.

 

After reading this article you will have a grasp of:

  • How a trading business functions
  • What the components of a trading business are
  • What kind of expenses can you write off

 

It’s really quite simple,

 

Hobby’s cost money, businesses make money. The purpose of a trading business is to capture profits just like an ordinary business. The difference is you are not selling a product or providing a service, therefore the real benefits of creating an entity around your trading business is for tax purposes.

 

Forming Your Trading Entity

The most common way to setup a trading entity is as a Limited Liability Company (LLC) in the state which you live. While tax laws vary from state to state, they don’t provide a significant advantage when setting up your trading entity.

 

The name does not need to be extravagant, as the purpose of your LLC is to separate your trading capital from your personal investments, thus limiting your liability as the name states.

 

No matter what state you file your entity in, you will need to draft your Articles of Organization, a document which includes your:

  • Entity Name
  • Purpose
  • Known Place of Business Address
  • Members and Percent of Ownership
  • Member Signatures

 

In most cases you will be the sole managing member of your trading entity. I recommend reviewing the information at IRS.gov on setting up an LLC. It is also effective to file your LLC taxed as an S-Corp. This is strictly for tax purposes as it makes the itemization process easier.

 

Once you create your entity you can then file for an Employee Identification Number (EIN). This number will be used on all tax forms and trading accounts as this is how the IRS will identify your trading entity separate from your personal social security number.

 

Your licensed tax professional will be able to walk you through this process and answer any questions you have along the way. I would check to see if they have experience with trading tax accounting as there is a lot of grey area in the current laws.

 

Do you qualify for trader tax status?

 

This is the first question you need to ask. I will reference Robert Green’s book, Tax Guide for Traders as this has become the industry standard for trader tax accounting.

 

What is Trader Tax Status?

 

There is no objective test to establish trader tax status qualification. The IRS developed the following criteria to determine if you’re eligible for trader tax status.


  1. 1. The taxpayer’s trading must be substantial, regular, frequent and continuous. Sporadic trading won’t be a trade or business.
    2. The taxpayer seeks to catch the swings in the daily market movements and profit from these short-term changes rather than profiting from long-term holding of investments.
     
    As you can see the criteria is quite ambiguous, however if you are day trading the futures markets for example and are a full-time trader and have no other major sources of income to pay your living you qualify without question. If you are a part-time trader because you have another business activity, the IRS may scrutinize your qualification for trader tax status.
     
    What is Mark to Market Accounting?
    Mark-to-market (MTM) refers to the procedure you follow at year-end when you mark all your open positions to market prices. MTM only applies to trading gains and losses it does not apply to a trader’s business expenses. You must elect MTM accounting; it does not default when you file trader tax status.
     
    Commodities and futures use a different tax method than securities, the 60/40 rule. This means 60% is taxed at the long-term capital gains rate, and 40% at the short-term. MTM accounting is not a preferred method for profitable commodities and futures business traders because this blended 60/40 rate is significantly less than having your entire profits taxed at the short-term rate.
     
    What if You Have a Losing Year?
    Business taxpayers are allowed the benefit of net operating loss tax laws. These laws provide the opportunity to carry back and/or forward business losses. Make a fortune in one ear and pay your taxes then lose a fortune in the following years and carry back your net operating losses to get big refunds.
     
    What Expenses Can a Trading Business Write Off?
    Other benefits of setting up a trading entity are the ability to create retirement plans, deduct medical and health insurance premiums, and write off additional expenses such as computer equipment, travel to trade shows, and education materials.
     
    Since your trading gains and losses are considered ordinary gains and losses when electing MTM accounting you may deduct in full against any type of tax return income. The ability to deduct home office and education expenses and depreciation on computers and office equipment is a benefit not allotted to the typical investor. The business trader may use schedule C for these business expenses.
     
    Whether you decide to setup a trading entity and file for trader tax status or continue as a non-business trader, you must develop a detailed plan for the future if you want to succeed.
     
    Consult Your Tax Professional
    Make sure to consult with a licensed tax professional that is well versed in trader tax law. I am not a licensed tax professional nor am I affiliated with Robert Green’s Accounting Firm, Green Trader Tax. I just find their resources extremely helpful.
     
    Resources from this article:

For more detailed information on Trading Futures visit the EminiMind blog.

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.
Note: Your post will require moderator approval before it will be visible.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.


  • Topics

  • Posts

    • QBTS D-Wave Quantum stock with a local breakout, good volume +235% at https://stockconsultant.com/?QBTS
    • PLAY Dave & Busters Entertainment stock, big bounce off the lower 24.48 double support area at https://stockconsultant.com/?PLAY
    • INO Inovio Pharmaceuticals stock, watch for a bottom breakout above 2.33 at https://stockconsultant.com/?INO
    • CADL Candel Therapeutics stock, watch for a range breakout, target 12 area, volume +82% at https://stockconsultant.com/?CADL
    • Date: 19th February 2025.   Is the DAX Overbought After Rising For 7 Weeks Straight?   The DAX rose by 20% in 2024, however, in 2025 so far the DAX has risen more than 15% in only 50 days. The DAX has risen for seven straight weeks, driven by rate cuts and strong earnings reports. Can the DAX maintain momentum or is the price overbought? DAX 40 - What’s Driving the Bullish Trend? Three factors are driving the price of the DAX higher. The first is the European Central Bank which has cut for 2 consecutive months and is likely to adjust a further 0.75% in 2025. The lower interest rates and expectations of further cuts are known to support the DAX due to higher consumer demand.     The second factor driving prices higher are the positive earnings data. SAP SE is the most influential stock and has risen by 18% so far this year. SAP’s latest quarterly earnings report saw the company beat revenue expectations by 2.60% and earnings by 1.40%. The second most influential stock for the DAX is Siemens AG which has risen almost 20% in 2025 so far. All of the seven most influential stocks have risen in value this year so far and only 17% of the whole DAX have declined this year so far. However, traders should note that not all companies within the DAX have made public their quarterly earnings reports. The third factor is the expectation that the Ukraine-Russia conflict will end or reach a ceasefire in the first half of the year. Traders should note that an end to the conflict is more crucial for European indices in comparison to Asian or US indices. This is due to the nature of Europe and European geopolitics. Is the German DAX Overbought? When analyzing the price movement the index is trading in the overbought zone on most oscillators and on most timeframes. However, price action and previous impulse waves indicate the price will not be overbought unless the price increases above 23,250EUR. However, the intrinsic value of the DAX will also depend on US tariffs. If Germany is able to avoid harsh US tariffs, German stocks may continue to increase higher as sentiment improves. However, harsh tariffs are likely to apply downward pressure on the index and increase the likelihood of being overbought in the short-to-medium term. If the price indeed declines, traders may first target the support level at $22,437.58, which will likely fall in line with the 75-period Moving Average. The main bullish breakout point is at the 22,724.30 mark. Tariffs on Foreign Cars A key risk for the DAX as mentioned above is US tariffs, particularly on cars. The DAX index includes Mercedes-Benz, Porsche AG, BMW, and Volkswagen. Total new cars sales in the US from these 4 companies make up almost 10% of the overall sales.     Donald Trump remained defiant despite warnings that his proposed trade war could disrupt the US economy, stating that his administration might impose tariffs of approximately 25% on foreign cars within weeks. He also announced that semiconductor chips and pharmaceuticals would soon face higher tariffs, speaking at a news conference on Tuesday. Key Takeaway Points: The DAX has surged over 15% in 2025, driven by ECB rate cuts, strong earnings, and optimism over the Ukraine conflict. SAP SE and Siemens AG are the top-performing stocks and 83% of the DAX has witnessed gains. However, some earnings reports are still pending. Despite trading in overbought territory, the index may continue rising unless it faces harsh US tariffs. Potential US tariffs on foreign cars pose a key risk, impacting major DAX-listed car makers. This includes Mercedes-Benz, Porsche AG, BMW, and Volkswagen. Always trade with strict risk management. Your capital is the single most important aspect of your trading business.   Please note that times displayed based on local time zone and are from time of writing this report.   Click HERE to access the full HFM Economic calendar.   Want to learn to trade and analyse the markets? Join our webinars and get analysis and trading ideas combined with better understanding of how markets work. Click HERE to register for FREE!   Click HERE to READ more Market news.   Michalis Efthymiou HFMarkets   Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in Leveraged Products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.
×
×
  • Create New...

Important Information

By using this site, you agree to our Terms of Use.