Are You a Regular Investor or a Tax-Favored Securities Trader?
Recent stock market volatility makes us focus on the question of exactly who is eligible for the favorable federal income tax treatment accorded to individuals who trade stocks with sufficient intensity to be classified as securities traders in the eyes of the IRS.
Not-so-favorable federal income tax treatment applies if you trade stocks fairly actively but without enough vigor to be considered anything other than a garden-variety investor.
There’s no bright-line distinction between trader and investor status, so we must rely on court decisions to assess the issue.
Let’s summarize the important federal income tax advantages of securities trader status for those who qualify. You may be among them—or not.
If You’re a Trader, You Can Deduct Expenses on Schedule C and Make the Taxpayer-Friendly Mark-to-Market Election
If you can be classified as a securities trader for federal income tax purposes, as opposed to being a garden-variety investor, you’re considered to be in the business of trading securities. That means you can deduct your trading-related expenses on Schedule C of Form 1040. Good!
Garden-variety investors cannot deduct any of their investment-related expenses under our current federal income tax regime.
The most important advantage of trader status is that you’re eligible to make the Coeur d’Alene Idaho taxpayer-friendly mark-to-market election. That election is not available to garden-variety investors.
When you have a mark-to-market election in force, you gain two important federal income tax advantages.
Advantage 1: Exemption from the Capital Loss Deduction Limitation
Because you are a mark-to-market trader, your trading gains and losses are simply considered business income and expenses, respectively. So, if you have an awful trading year, as many traders did in 2022, you can deduct your trading losses in full.
In contrast, if you’re a garden-variety investor, you’re subject to the $3,000 annual limit on deductible net capital losses, or $1,500 if you use married-filing-separately status.
Advantage 2: Exemption from the Wash Sale Rule
Because you are a mark-to-market trader, your trading portfolio is exempt from the dreaded wash sale rule that would otherwise defer tax losses when you acquire substantially identical securities within 30 days before or after a loss sale.
When the wash sale rule applies, the disallowed loss is added to the basis of the substantially identical securities that triggered the rule.
Key point. Gaining an exemption from the wash sale rule via the mark-to-market election saves you from lots of non-productive calendar-watching and bookkeeping.
The Price of the Mark-to-Market Election
As a Couer d’Alene trader who has made the mark-to-market election, you must pay a price for the aforementioned tax advantages. Here’s the price: On the last trading day of the year, you must pretend to sell your entire trading portfolio at market and book the resulting gains and losses for federal income tax purposes.
You’re then deemed to immediately buy back everything in your trading portfolio for the same prices. So, the securities in your trading portfolio begin the next year with tax basis equal to market value and with no unrecognized tax gains or losses.
But if you have little or nothing in your trading portfolio at year end, as may often be the case, these imaginary mark-to-market transactions have little or no tax impact.
Deadline for Making the Mark-to-Market Election
If you’re a Coeur d’Alene trader who uses the calendar year for federal income tax purposes, you’ve already missed the deadline for making the mark-to-market election for your 2022 tax year, assuming you did not already make the election for an earlier year.
According to IRS rules, you must make the election for a calendar year by the unextended due date of your Form 1040 for the previous year. So, the deadline to make the election for your 2022 tax year was April 18, 2022. That’s way back in your rearview mirror.
Deadline alert. If you’re a calendar-year taxpayer, the deadline to make the mark-to-market election for your 2023 tax year is April 18, 2023. That date will be here before you know it!
Make the election by including a statement with your 2022 Form 1040 filed by that date or with a Form 4868 extension request for your 2022 return filed by that date.
Passing the Test to Qualify as a Securities Trader
To be classified as a securities trader rather than a garden-variety investor, your trading activities must constitute a business, and you must meet both of the following requirements.
· Your trading must be frequent and substantial.
· You must seek to profit from short-term market swings rather than profit from longer-term strategies.
Say Goodbye to 100 Percent Bonus Depreciation in 2023
All good things must come to an end. On December 31, 2022, one of the best tax deductions ever for businesses will end: 100 percent bonus depreciation.
Since late 2017, businesses have used bonus depreciation to deduct 100 percent of the cost of most types of property other than real property. But starting in 2023, bonus depreciation is scheduled to decline 20 percent each year until it reaches zero in 2027.
For example, if you purchase $100,000 in equipment for your business and place it in service in 2022, you can deduct $100,000 using 100 percent bonus depreciation. If you wait until 2023, you’ll be able to deduct only $80,000 (80 percent).
Does this mean you should rush out and purchase business property before 2022 ends to take advantage of the 100 percent bonus depreciation? Not necessarily. For many businesses, an alternative is not going away: IRC Section 179 expensing.
Both IRC Section 179 expensing and bonus depreciation allow business owners to deduct in one year the cost of most types of tangible personal
property, plus off-the-shelf computer software. Both can be used for new and used property acquired by purchase from an unrelated party. Both also can be used to deduct various non-structural improvements to non-residential buildings after they are placed in service.
Moreover, the two deductions aren’t mutually exclusive. You can apply Section 179 expensing to qualifying property up to the annual limit and then claim bonus depreciation for any remaining basis. Starting in 2023, when bonus depreciation will be less than 100 percent, any basis left after applying Section 179 and bonus depreciation will be deducted with regular depreciation over several years.
But there are some significant differences between the two deductions:
- Section 179 expensing is subject to annual dollar limits that don’t apply to bonus depreciation. But the limits are so large that they don’t affect most smaller businesses.
- Section 179 expensing requires more than 50 percent business use to qualify for and retain the Section 179 deduction. For bonus depreciation, you face the more than 50 percent business use requirement only for vehicles and other listed property.
- Unlike bonus depreciation, Section 179 expensing is limited to your net taxable business income (not counting the Section 179 deduction) and cannot result in a loss for the year.
- The 2022 Section 179 deduction is limited to $27,000 for SUVs. There is no such limit on bonus depreciation.
- You can use bonus depreciation to deduct land improvements with a 15-year class life, such as sidewalks, fences, driveways, landscaping, and swimming pools.
Generally, there is no great need to purchase and place the property in service by the end of 2022 to take advantage of 100 percent bonus depreciation. But there can be exceptions.
For example, if you own a rental property and want to make substantial landscaping or other land improvements, you’ll get a larger one-year depreciation deduction using 100 percent bonus depreciation in 2022 than if you wait until 2023, when the bonus will be only 80 percent.
Buying an Electric Vehicle? Know These Tax Law Changes
There’s good and bad news if you’re in the market for an electric or plug-in hybrid electric vehicle.
The good news is that the newly enacted Inflation Reduction Act includes a wholly revamped tax credit for electric vehicles that starts in 2023 and continues through 2032.
The bad news is that the credit, now called the “clean vehicle credit,” comes with many new restrictions.
The clean vehicle credit remains at a maximum of $7,500. But beginning in 2023, to qualify for the credit,
- you will need an adjusted gross income of $300,000 or less for marrieds filing jointly or $150,000 or less for singles; and
- you will need to buy an electric vehicle with a manufacturer’s suggested retail price below $80,000 for vans, SUVs, and pickup trucks, or $55,000 for other vehicles.
But that’s not all. The 2023-and-later credit includes new domestic assembly and battery sourcing requirements.
The new law reduces or eliminates the credit when the vehicle fails the battery sourcing requirements. Currently, no electric vehicle will qualify for the full $7,500 credit. Manufacturers are working feverishly to change this, but it could take a few years.
The new credit is not all bad—it eliminates the cap of 200,000 electric vehicles per manufacturer. Thus, popular electric vehicles manufactured by GM, Toyota, and Tesla can qualify for the new credit if they meet the price cap and other requirements.
And then, starting in 2024, you can qualify for a credit of up to $4,000 when purchasing a used electric vehicle from a dealer (not an individual). But income caps also will apply to this credit.
Also, starting in 2024, you’ll be able to transfer your credit to the dealer in return for a cash rebate or price reduction. This way, you can benefit from the credit immediately rather than waiting until you file your tax return.
If you are locked out of the new credit because your income is too high or you wish to purchase a too-expensive electric vehicle, consider buying a qualifying electric vehicle (assembled in North America) on or before December 31, 2022.
If you buy an electric vehicle for business use in 2023, you have a second option: the commercial clean vehicle credit.
Claim Your Employee Retention Credit
If you had W-2 employees in 2020 and/or 2021, you need to look at the Employee Retention Credit (ERC).
As you likely know, it’s not too late to file for the ERC. And now is a good time to get this done.
You can qualify for 2020 credits of up to $5,000 per employee and 2021 credits of up to $7,000 per employee for each of the first three quarters. That’s a possibility of $26,000 per employee.
One of our clients—let’s call him John—had 10 employees during 2020 and 2021. He qualified for $260,000 of tax credits (think cash). You could be like John.
You have three ways to qualify for the ERC:
- Significant decline in gross receipts. Here, you compare the gross receipts quarter by quarter to those in 2019. To trigger any ERC under this test, you need a drop of more than 50 percent in 2020 and a drop of more than 20 percent in 2021.
- Government order that causes more than a nominal effect. Here, your best bet is to use the safe harbor for nominal effect. This requires looking at either your 2019 quarterly receipts or your 2019 quarterly hours worked by employees and seeing that the 2020 or 2021 shutdown order would have affected the 2019 figures by more than 10 percent.
- Government order causes a modification to your business. Here, you also have a safe harbor. The IRS deems that the federal, state, or local COVID-19 government order had a more-than-nominal effect on your business if it reduced your ability to provide goods or services in the normal course of your business by not less than 10 percent.
The ERC can help all businesses that qualify, even those businesses that did not suffer during the COVID-19 pandemic.
The IRS recently issued new cryptocurrency guidance and is hot on your trail if you bought and sold cryptocurrency and didn’t report it on your tax return.
Here are the tax basics: You’ll treat cryptocurrency as property for tax purposes:
- If you receive bitcoin in exchange for your services, then your income is the fair market value of the bitcoin received. Your basis in the bitcoin received is its fair market value at the time of receipt plus any transaction fees incurred.
- If you receive bitcoin in exchange for your property, then your gain or loss is the fair market value of the bitcoin received less the adjusted basis of your property given up. Your basis in the bitcoin is its fair market value at the time of receipt plus any transaction fees incurred.
- If you give bitcoin in exchange for services, then the value of the expense is the fair market value of the bitcoin given. Also, the value of the services received less the adjusted basis of the bitcoin is a gain or loss to you.
- If you give bitcoin in exchange for someone’s property, then your gain or loss is the fair market value of the property you received less the adjusted basis of your bitcoin.
Cryptocurrency is a capital asset (provided you aren’t a trader). Therefore,
- you pay tax on any gain at reduced rates, and
- losses are subject to capital loss limitation rules.
In the cryptocurrency world, a fork occurs when the digital register that logs transactions of a particular cryptocurrency diverges into a new digital register. There are two types of forks:
- one in which you don’t get cryptocurrency, and
- one in which you get new cryptocurrency.
The IRS ruled that
- a fork in which you don’t get cryptocurrency is not a taxable event, and
- a fork in which you get new cryptocurrency is a taxable event and you’ll recognize ordinary income equal to the fair market value of the new cryptocurrency received.
Example. You own J, a cryptocurrency. A fork occurs and you receive three units of K, a new cryptocurrency. At the time of the fork, K has a value of $20 per unit. You’ll recognize $60 of ordinary income due to the fork.
When selling property, you generally sell it on a first-in, first-out (FIFO) basis, unless you are eligible to use the specific identification method. You want to use the specific identification method if you can because you can select the amount of gain or loss your sale will create. With FIFO, you have no choice.
To use the specific identification method, you’ll have to either
- document the specific unit’s unique digital identifier, such as a private key, public key, and address, or
- keep records showing the transaction information for all units of a specific virtual currency, such as bitcoin, held in a single account, wallet, or address.
This information must show
- the date and time you acquired each unit;
- your basis and the fair market value of each unit at the time you acquired it;
- the date and time you sold, exchanged, or otherwise disposed of each unit;
- the fair market value of each unit when you sold, exchanged, or disposed of it; and
- the amount of money or the value of property received for each unit.
Here’s What to Do.
Filing your taxes is never a fun thing to do, but if you don’t file them at all then the IRS will come calling. They have unbridled power to file a return on your behalf in theirs, not yours, best interest.
They have powerful collection tools and an unforgiving nature that makes this one of the worst mistakes anyone could make. Getting on their bad side isn’t easy; having years worth of unfiled returns only adds fuel to the fire!
The IRS is always on the lookout for taxpayer’s who haven’t filed legally required income or payroll tax returns. If you have unfiled tax returns, it’s only a matter of time before they find out and demand the return and their money with penalties and interest! When it gets to a point where the IRS contacts you, the amount they claim you owe will be far greater than the amount you actually owe if you haven’t filed. You don’t want this situation and unfortunately in these circumstances the amount they claim you owe is what you will have to pay unless you prove otherwise.
Before we jump into it, if you have back tax debt or years of unfiled tax returns, contact our firm for a consultation email@example.com or call (208) 415-1850. You won’t have to talk to, or meet with, the IRS and our firm can provide the peace of mind you need to resolve your tax issue.
The longer you wait, the worse the situation will become. Here are some important steps you can take if you have unfiled returns with the IRS.
Get Your Documentation
If you’ve been neglecting your taxes for too long, it’s time to take care of things. An experienced tax resolution firm can help get things back on track and oftentimes, even if the records are missing or destroyed, there are alternative methods to reconstruct your tax return. However, only a tax resolution professional will be able to accomplish this.
If you are missing W2 and 1099 forms from past years an experienced tax resolution pro has the ability to retrieve these as well.
Go Through the Numbers
The fear of not having the money to pay has caused many people to avoid filing their returns altogether, but those worries are often misplaced.
According to the IRS statistics approximately one-third (34%) of all unfiled federal tax forms may actually be due a refund! Now that you have all the documentation you need, it is time to run the numbers. And while you may not be able to get exact figures without filing the returns, you can get an idea of how much you might owe.
Hire a Professional
Whether you are an individual, partnership or corporation there is a strong temptation to let your past mistakes go. But doing so would put both financial security and freedom at risk – which makes filing those old tax
returns seem like tempting fate instead of bravely taking on the challenge ahead! It is a misdemeanor and possible jail time for failing to file legally required income tax returns. Don’t let this happen to you.
The IRS will assess a 25% failure to file penalty as well as up to a 25% failure to pay penalty, plus interest. Just filing your return, even if you can’t pay, will save you big time!
When you’re dealing with back taxes, it’s important to have someone on your side who knows what they are doing. A tax resolution professional can give invaluable advice and guidance about how to lower the amount that the IRS claims you owe and the best steps moving forward for your situation.
You’re not alone in the battle against the IRS. The IRS is ready and waiting for you, so it’s best to have an expert on your side who knows how to get the help you need and deserve.
A tax resolution professional can give advice about what needs to be done; from gathering documents like W-2s or 1099’s right down to making sure everything looks perfect when filing those unfiled returns.
Contacting the IRS on your own is not only a scary thought, it’s highly not recommended, but avoiding them will make your situation worse. When you don’t file your taxes and lose track of what’s owed to the government it can have devastating consequences for both yourself personally as well as financially. The IRS stores detailed records of everyone in their database
and chances are, you are already on their radar due to your lack of compliance.
Filing those returns ASAP will go miles in helping you get back on track before any more damage becomes irreversible. Filing your taxes might seem like a daunting task, but there is help for you. The right professional can make things right with the IRS and relieve the stress from this difficult situation.
Get Rid of the Stress
The stress of not filing taxes can be enough to make you lose sleep. What’s worse, IRS problems usually affect all aspects of one’s life. Do yourself and your sanity a favor by filing your returns now; it isn’t nearly as scary or daunting as receiving the final collection letter from the IRS or getting your bank accounts levied.
If you are looking for tax relief, we can help! To help ease the stress from your situation, we offer a free consultation with one of our tax resolution experts. You don’t have to worry about the cost because the consultation is completely free.
Dealing with tax issues can often be a challenge and feel overwhelming for many people. Choosing to work with a tax resolution professional is often a great choice if you are dealing with the IRS. These tax relief specialists can guide you throughout the entire process to help you avoid making costly mistakes. You will also have much less stress knowing that an experienced professional is working hard on your behalf.
The IRS is no stranger to audit and it can be a stressful process. If you’ve received a notice from them, don’t panic! There are many things that could help relieve the stress – like working with one of our top-rated tax resolution professionals who will fight hard on your behalf so there’s less risk for penalties or interest charges along with preserving any possible defenses against accusations from this difficult situation.
Here are 5 critical reasons why you need to partner with a tax resolution expert.
1) Relief from the IRS & Your State of Mind
When you receive the first letter from the IRS, it can make your stomach drop and your heartbeat a little faster, but working with a tax resolution expert can set your mind at ease because you have a professional working on your case to help you through this gut-wrenching experience. As an
added bonus more often than not, once you hire a tax resolution expert you won’t have to meet or speak with the IRS.
2) Guidance from a Professional
One of the benefits of hiring a tax resolution professional is that it gives you access to professionals that do this type of work on a daily basis. Working with a tax resolution expert is especially important if you are dealing with any back taxes. They understand the latest laws impacting your case to help you make the best decision for your situation.
3) Saves You Money
An added benefit of hiring a tax resolution professional is that it can save you a lot of money. Yes it will cost money to hire them, but it’s a lot less expensive compared to having no representation at all. A tax resolution professional also has more experience with handling different issues compared to an accountant, which is why it’s recommended to hire a tax resolution professional if you are dealing with the IRS.
4) Get Your Time Back
Trying to research all of the regulations involving the tax code is nearly impossible for most people. However, working with a tax resolution professional is a great way to resolve your tax issue as they must keep up to date with the latest laws. These professionals understand all of the in’s and out’s of the IRS maze and can help you negotiate the lowest possible settlement amount or the lowest possible monthly payment amount, allowed by law.
5) Avoid Costly Mistakes
Mistakes can easily happen while you are dealing with the IRS without you even knowing it. Unfortunately, even small mistakes can lead to significant penalties and cause plenty of headaches. Hiring a tax resolution professional is a great option for avoiding these mistakes. They deal with these situations on a daily basis and understand how to work with the IRS to ensure you can save the most amount of money.
Working with a tax resolution professional is something that many people find to be both beneficial and necessary. They can help you avoid costly mistakes when filing taxes or during an IRS audit, as well offer much needed guidance throughout the process of doing so! By partnering up for this kind of work, you’ll have saved yourself tons of time by working together instead of spending hours trying to figure out what’s wrong on your own – while avoiding stress altogether.
OWE BACK TAXES?
If you owe the IRS or state $10,000+ and are feeling blindsided every year by a huge tax bill – don’t wait. We can help! Contact us today for more information about how we’ll work to settle your debt so that it doesn’t become impossible tomorrow. It’s always difficult when faced with major financial problems such as unpaid taxes; however there is relief available through reputable organizations like Coeur d’Alene Tax Returns & Resolution which specializes in settling debts without going into collections agencies.