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Saving Money on Stock Trading Expenses & Education by Starting a Business? Ep 46

In this week’s post, we have tax-related questions about how you can save some money tax-wise on your trading.

I’ll give you my best shot on this, but take a look at the question.

Here’s the question:

“Hello, Sasha! My name is Chris, and I have a question in relation to an individual that would be intending to invest their money or lightly trade their money here in the United States.

The question is whether or not it may be beneficial to form what we might consider an LLC or an S Corp or a C Corp or something of that sort to gain tax benefits.

Things such as writing off educational expenses, computer equipment, office space, and things like that. I don’t know if it’s a beneficial thing or not, and I’m trying to reach out to somebody who might be able to get some thoughts on that. 

This question is in relation to being here in the United States, and it is not in relation to what the IRS considers a professional trader. I am more specifically talking about someone who intends to invest their money. Or lightly trade them throughout the year, but yet make a nice chunk of profit. 

Also, would it be beneficial to start a business that is nothing related to trade investing but yet throw those investing measures and trading measures underneath that business for tax purposes?

Thank you!”

Discussion about Saving Money on Stock Trading Expenses

I’m going to say right off the bat – it’s more difficult for me to answer because I’m not a tax expert. I don’t know your tax situation. So for anybody that is a tax professional, feel free to leave additional comments at the end of this post.

I’m going to do my best shot to answer this question based on future consultation or past consultations I’ve had with tax professionals on the subject. This is how I structured my personal life around it.

Quick Tip: Spend a couple of hundred dollars, talk to a tax expert for your specific situation. I’m not a tax expert, and those tax laws do change quite often.

That’s my disclaimer.

There is a professional tax trader status that you could get if you’re trying to deduct. The whole big picture is we’re trying to deduct money from things we use in trading: computer and educational expenses.

That way, we pay the government a lot less, thinking of this as a business. The government doesn’t recognize trading as a business. They look at it as investing. But you can get trader status, which is a little more difficult to get.

You have to apply for it. And even then, it’s challenging to apply for it. I found one of the better benefits (especially if you trade options) there’s a 1256 tax code in it where 60% of your trades are counted as long term even if they’re 5 minutes, 2 minutes.

And 40% short-term capital gains tax which you can read much more about on other links.

It has to be traded like futures types of contracts. It could be like the SPX. They look at this as tax savings.

Read more about that if you want to learn.

And talk to your tax professional.

Is Trading a Business or not?

If you look at an individual or a person, this is what you need to know. You make your money, and then you pay the government some money. This is the taxes that you pay.

He was talking about was why don’t we create an S-Corp or an LLC so that way we could deduct computer, education, courses. That way, it looks like we make less. 

Let’s say you’re making $50,000 a year, and you deduct $20,000 on expenses. In simple form, you’re paying taxes on $30,000. And that’s what they get.

What happens here with an S-Corp or LLC you could set one up like that. And then trade under it. But remember the S-Corp or LLC you still have to distribute your earnings.

If we look at TD Ameritrade, you could open up corporate accounts. There are many more types of specialty accounts on here. I think they’re under specialty accounts.

There’s a limited liability here account. There is a limited partnership account. There’s a corporate profit or nonprofit account.

What you have to remember is that the double taxation problem here. This is just from my personal knowledge. Talk to your tax expert, talk to your accountant. I could be completely wrong on this.

But from here, what happens is the corporation pays taxes to the government.

You’re paying to the government. And then what happens is you also have to pay money to yourself. And later you pay again to the government from those distributions.

This was in the past what happened with this type of situation and this type of plan. You’re paying almost in a way a double form. The way that I approached it was, I looked at an overlapping business.

That’s because when I first started, I couldn’t get trader status. When you’re brand new, you’re not trading a lot. And that’s the case, especially if you’re doing light trading.

Let’s say you want to trade quite a bit. You could start a daycare business. That’s not even involved in trading, but they have some overlap.

You still have computers and paper that’s still used. It still overlaps a little bit. But if you do an educational trading business, that overlaps much more.

Education helps this secondary business. Or anything that is computer related, phone related to run that business. You could also use to make trades.

The more that you overlap, the more that you can deduct. I don’t know if it’s worth it in your situation to set that up.

S-corp and LLC Set-up 

When you’re setting up an LLC or an S-corp, and you have this payroll problem. You have a payroll that you also have to run that costs $100 per employee per month.

There are additional paperwork and documents you have to do. Not to mention, you have two tax forms that you have to do — one for the S-corp one for your individual.

You have that additional document that you have to do to file the taxes. There’s more involved than just looking at the percentage of return. However, if trading is your full-time, that’s a different story.

If you’re looking to do it part-time, I wouldn’t think of taxes as a major thought process. But if you do want to think about it in mind, I would say the better alternative is to overlap it with a business that makes sense in your own life.

I’m not an expert on this. I don’t study the tax laws that much. These are certain things that I’ve learned over the years. You have to run payroll in the United States if you’re running a business, and it’s successful in making money.

You could start two or three businesses. You could start four or five businesses. But once you start growing these things, it becomes more complicated. The same thing, if you create a business to be able to deduct things, is it worth it to run payroll? 

  • Is it worth it to have that additional tax form? 
  • Is it worth it to stay in compliance to be able to reconcile your sheets, meaning all your bank statements for that business?

You have to think about those things. I would say just paying someone a $100 – your tax professional might be worthwhile. I think the first few years of trading it’s not worth it. But you have to figure it out on your personal needs.

Everybody’s situation is different. And the tax and the way that they work they’re very complicated. 

Take a look at S-Corp paying taxes.

You’re not paying the same amount of taxes as you would as an individual. That’s because they pay things a little bit differently.

How are S-Corps taxed? You have to think about this.

There are so many different things. And other problems could arise.

I think this question is just more in-depth than what I can answer. I think the simple approach for most people is to not go that far into thinking about it or making a huge decision just on the tax implications.

Those tax laws do change. If you’re thinking about taxes and you’re trading a lot, the 1256 trading rule has been used a lot through the options traders world.

You could split accounts into different things. That’s typically a saving. If you’re looking for a retirement account versus a standard account that also does help.

But otherwise, to create a business around it, I think that’s getting involved in it. And you have to know and understand the tax laws.

The advice I might have just given you may not be the smartest approach. Talk to your tax advisor and tax professional. Spend a hundred bucks and get a real answer and consult with that.

If you’re going to spend 10-20 hours setting up a business and reconciling your sheets, your bank statements, if you’re going to be putting in paperwork with your state to register this as a business – it’s worth it to spend an hour with the tax professional.

That way, you will be looking and digging deeper into your situation. 

  • How much you’re looking to spend?
  • What’s your current income?
  • How much your current trading income?

That’s what I would recommend. Spend the time with a real tax professional that’s focused on you and gives you a one-on-one personal session.

Final Word

It’s one of the few questions that I can’t answer in-depth as much as I would love.

Think about the 1256 trading rule, the different retirement accounts, and an overlapping business.

I found that was the simplest approach because if you have overlapping business, it’s all just about writing things on paper.

How do you see those things are written out on paper that’s really what the government’s looking at. And if you write it one way versus another, well, then that’s how it goes.

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