Question

What kind of expenses One can deduct on Sch C as Trader (with TTS)?

Forum|Forum|3 years ago
April 17, 2023
4 replies
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I am thinking of using Trader Tax Return this year. I no other source of income other than trading or have my own health insurance (no pre tax deduction of premiums yet at any where either employer or via someone else).

My understanding is there isn’t a tax election for claiming TTS. — it’s determined based on facts and assessed at year-end (such as Volume, Frequency and Holding period of trades).

List Trader as profession and Just fill in Sch C and there is code on Sch C (Line B) and I looked up it is 523110 (I think this more of appropriate code for standalone self Traders ? Or there is any thing else one needs to do to claim TTS?

Business Expenses on Schedule C show up as losses and my understanding is they are an above-the-line deduction from gross trading income income? There are no revenue of Sch C for traders as their profits goes to other forms (Sch D for capital gains and Sch B for interest/dividends) and only expenses/deductions goes on Sch C?

What kind of expenses a TRADER can claim as expenses on Sch. C as business expense e.g(please say yes or no on each)

subscription fees,

market data fees,

margin interest,

equipment like computers

Books or education courses related to trading

Things I am NOT sure

Home office deduction e.g if your office and office bathroom is 400 Sq ft in 2000 Sq ft home

then proportion rate size of your office to your total home size (e.g 20% of mortgage, property tax)

What is deduction possibility for Utilities such as Gas, electricity, home insurance and internet and even phone) and what should be rate. Same as office size like 20% in my earlier example?

These days all financial institution require phone as 2 factor , can phone and phone bill be deducted as expense and if yes what proportion? 50% or 20% of total cost?

Can one deduct Health care and dental Care Insurance premium on Sch C?

Thanks

S

sam992116Author

Any one?

G

GeorgeM777

Yes, as to subscription fees, market data fees, equipment like computers, books or education courses related to trading. Margin interest falls into a different category. Margin interest, that is, money that you borrow to purchase taxable investments, is deductible provided you itemize your deductions. And there are limitations to deducting margin interest in that the deduction cannot exceed your net investment income.

Your expenses associated with your trading business are reported on Schedule C, Profit or Loss From Business. However, you will have no income to add to Schedule C because your trading income is all characterized as capital gain or capital loss income (this assumes you have not made the mark to market election under Section 475(f) of the IRC). Capital gains/losses are still reported on Form 8949, or Schedule D. Thus, you have no "earned income" as that term is defined under the IRC.

Because you have no income to report on Schedule C, you are not eligible for the home office deduction. The home office deduction is only available if you have net income from your business. However, your home office expenses can be carried over to the next year.

Health insurance deductions are not reported on Schedule C. Self-employed health insurance is an adjustment to income and is reported on Schedule 1 to the Form 1040. The deduction cannot exceed the earned income you collect from your business. As a trader (who has not elected mark to market) you will have no earned income. Rather, as noted herein, your gains/losses from your trading business are characterized as capital gains/capital losses. Thus, with no earned income from your business, you will not be able to deduct your self-employed health insurance.

@sam992116

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S

sam992116Author

Where in TT interview should I enter computer purchase for trading? Is there a $$ limit?

Does Audio equipment (hands free audio headphone for trading education) count as deduction?

For hardware purchase there are 2 deduction, One is actual deduction and 2nd is depreciation (I think that one is section 179). Does TurboTax automatically fills out 179 form? If I a filling out on my own how do I link to sch C or some other 179 related items coming from K1? Right now I don't see any form 179 in Forms modes?

On Sch C, Line 25 is Utilities as Business expense. What kind of Utility expense will go on Sch C line 25 vs Home office deduction (form 8829)?

I don't any income on Form C this year. Technically I can still fill out Form 8829 (Home office deduction) to carry over those expense next year as situation may change? Worth it or may be?

S

sam992116Author

Anyone?

Where do expenses listed on Sch C flow to? Do they directly go to 1040 (which line) or via some other form?

Where do Home Office 8829 Expenses go in case they are allowed or carryover to next year (in case not allowed this year? Which form for either case?

Where do one deduct either TurboTax software expense or Tax preparation fees (in case you hired someone, Turbotax do offer Live Tax advice service)? Sch A or can it be on Sch C (if have a business)?

D

Doony

I currently list my profession as an investor. Not a trader, do not currently claim Trader Tax Status.

Gains and losses on Schedule D. This is my primary income.

I have not written off expenses on Schedule C because I fear (a) it looks weird (b) I will incur social security tax.

You think it is OK to list gains on Schedule D and write off business expenses on Schedule C? Or will this catch the eye of IRS and potentially put me on hook for self employment tax?

Please note I take standard deduction.

R

RobertB4444

Your expenses can't go on schedule C because you don't have the type of business that allows it.

There wouldn't be any self-employment tax because you wouldn't have any income there. In order to be able to put your investment expenses on schedule C with your income on schedule D you need to be a trader.

You should consult an attorney in your area to go about structuring your investment business to allow you to deduct expenses. There are a variety of options that would let you do exactly what you want to do. Once that structure is in place you will be all set.

@Doony

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D

Doony

Hello. Thank you very much for your reply.

If I was a trader--and not an investor--I believe my trading income would go on Schedule C, not Schedule D. As such, I would incur a self employment tax, which I am currently avoiding.

Does this sound correct to you?

D

Doony

In order to write off business expenses, must I identify myself as a trader? Or can I maintain my profession as an investor?

R

RobertB4444

Here is what the IRS says about being a Trader-

Special rules apply if you're a trader in securities, in the business of buying and selling securities for your own account. The law considers this to be a business, even though a trader doesn't maintain an inventory and doesn't have customers. To be engaged in business as a trader in securities, you must meet all of the following conditions:

You must seek to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation;
Your activity must be substantial; and
You must carry on the activity with continuity and regularity.

The following facts and circumstances should be considered in determining if your activity is a securities trading business:

Typical holding periods for securities bought and sold;
The frequency and dollar amount of your trades during the year;
The extent to which you pursue the activity to produce income for a livelihood; and
The amount of time you devote to the activity.

If the nature of your trading activities doesn't qualify as a business, you're considered an investor and not a trader. It doesn't matter whether you call yourself a trader or a day trader, you're an investor. A taxpayer may be a trader in some securities and may hold other securities for investment. The special rules for traders don't apply to those securities held for investment. A trader must keep detailed records to distinguish the securities held for investment from the securities in the trading business. The securities held for investment must be identified as such in the trader's records on the day the trader acquires them (for example, by holding them in a separate brokerage account).

Traders report their business expenses on Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship). Commissions and other costs of acquiring or disposing of securities aren't deductible but must be used to figure gain or loss upon disposition of the securities. See Topic no. 703, Basis of assets. Gains and losses from selling securities from being a trader aren't subject to self-employment tax.

If you qualify as being a trader then it is absolutely a good idea to use the schedule C for your reasonable deductions. Just be sure that you qualify.

@Doony

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D

Doony

Thank you so much. The issue is that sometimes people fall in a grey zone.

In 2023 I placed many trades--over 1000--and mainly focused on short-term swings in the market. It is my primary source of income etc etc.

After tax loss harvesting however, about half my income was dividends / interest and not trading.

So, after selling losses, it appears that half my income is dividends / interest and half is short-term trading. As such, tough to say if I can claim trader status. Not sure there's an answer unless I try and see what the IRS says.