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ETF/ETN, Trader Status & Mark to Market PowerPoint Presentation
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ETF/ETN, Trader Status & Mark to Market

ETF/ETN, Trader Status & Mark to Market

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ETF/ETN, Trader Status & Mark to Market

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  1. ETF/ETN, Trader Status & Mark to Market Liberty Tax Service 718-766-9303

  2. Topics to be discussed: • Tax system • Marginal tax rates • Capital gains • Basis • ETN / ETF • Trader status • “Mark to Market” election • Tax deductible expenses

  3. US Tax System The United States tax system is a Progressive Tax System. Tax rates increase as taxable income increases. Taxable income is your income after exemptions and deductions.

  4. 2009 Tax Brackets

  5. Capital Gains • Capital gain is the difference between the cost of an asset (i.e., stocks or bonds) and its sales price. • Tax rates are determined by type of asset, and how long the asset is held before sold. • Short-term capital gains (1 year or less) taxed at ordinary income rates. • Long-term capital gains (>1 year) taxed at capital gains tax rate. • Holding period begins the day after acquiring assets and ends the day of sale.

  6. Basis • Basis is generally the amount of your investment in a property for tax purposes. Used to figure gain or loss of a sale, exchange or disposition of property. • Basis includes price plus any commissions and recording or transfer fees • Your basis in some assets cannot be determined by cost (i.e., inheritance, gift) • If you have no records – IRS assumes worst case – your basis is ZERO

  7. Capital Gains Your capital gains will also be subject to state income taxes. Most states will tax your capital gains as ordinary income subject to the state income taxes rates.

  8. Capital Gains Tax Rates

  9. Capital Gains Tax Rates Through The Years

  10. Wash Sale- Rules and Tracking The wash sale rule prevents you from claiming a loss on a sale of stock if you buy replacement stock within the 30 days before or after the sale.

  11. ETF • Basic Rules for taxation are determined by the underlying asset. Taxable dividend payments are made at each institution’s discretion. • Commodity, Index and Sector tracking • Precious Metals • Currencies

  12. ETF - Currencies • Futures Contracts taxed 60/40 LT/ST • Money Markets, Treasuries or any equivalent ownership taxed as Ordinary Income whether gain is realized or not.

  13. ETF - Currencies “In terms of taxation, WisdomTree says normal capital gains rules will apply to the sales of fund shares. However, income from the portion of the fund invested in U.S. money market securities usually will be taxed as ordinary income, while the tax treatment of the local currency forward contracts could vary with the situation.” 

  14. ETF – Precious Metals • Examples are GLD & SLV • LT gains taxed as collectables • ST gains taxed as ordinary income • 1099 each year for expense • Futures Contracts taxed 60/40 LT/ST

  15. ETF Commodity, Index and Sector Tracking • ST Gains taxed as Ordinary Income • LT Gains taxed at Capital Gain rates • Dividends may be issued • Futures Contracts taxed 60/40 LT/ST

  16. ETN Commodity, Collectables, Index and Sector Tracking • IRS views ETN as a Debt Instrument • ST Gains taxed as Ordinary Income • LT Gains taxed at Capital Gain rates

  17. ETN Currencies, Treasuries, Money Markets …… • Interest and Relative Gain accrued is taxable prior to the sale of the ETN • At the time of sale gains and losses are treated as ordinary income and not eligible for capital gains treatment regardless of holding period

  18. Trader Status • For IRS tax purposes a Trader might operate as a "trade or business" if the intent is to profit from market price swings as the primary source of income for the year.  With this intent, once taxpayer's activity rises to a sufficient level it may be taxed under trader status rather than, by default, as an investor (investor status).Generally speaking to have Trader Status your activity must be substantial. and you must carry on the activity with continuity and regularity. nformation on the basis of mutual fund shares, refer to Publication 564, Mutual Fund Distributions.

  19. Trader Status • To be engaged in business as a trader in securities, you must meet all of the following conditions: • 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 • You must carry on the activity with • continuity and regularity.

  20. Trader Status • 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. • Extent to which you pursue the activity to produce income for a livelihood, and amount of time you devote to the activity.

  21. Trader Status • For the trade or business to gain Securities Trader Status or Commodities Trader Status with the IRS it might buy and sell Stocks, Stock options, Bonds, Futures, Commodities, E-mini's, QQQQ options, §1256 contracts, foreign currency contracts and so on.

  22. Trader Status-Deductible Expenses • Home Office Deduction • Margin interest • Interest Expense (for those who itemize) • Legal and Professional Fees • Business books and related materials • Dues in professional organizations • Subscriptions to investment newsletters and professional journals • Business licensing fees • Travel and Entertainment • New Equipment • Business Expenses • Services such as second phone line • Education Expenses

  23. Trader Status Maximize Deductions No bright line guidance for Trader qualification Generally tax code allows you to take a deduction for just about any expense that helps you produce income but the expense must be ORDINARY and NECESSARY Maintain complete books and records Underreported income penalties range from 20% to 75% Amend up to three years for NOL

  24. “Mark to Market” Election • Being a trader makes you eligible for mark-to-market accounting — but only if you make the mark-to-market election. • Once the election is made the IRS must approve a change in accounting method.

  25. “Mark to Market” ElectionSecurities • Trading losses not subject to $3,000 capital loss limitation • Securities not subject to the Wash Sale Rule • Paper losses in securities held at year-end are deductible • Paper gains in securities held at year-end are taxable • Gains in securities held over 12 months not taxed at long-term tax rates • Capital Loss carry forward may be trapped on Schedule D

  26. “Mark to Market” ElectionFutures and Commodities • Contracts have no long-term gain rate for 60% of gains • Contracts are not limited for deductibility of any trading losses • Capital Loss Carryforwards may be trapped on Schedule D

  27. “Mark to Market” Election • Jim JonesSSN 123-45-6789Attachment to 2009 Form 1040 I hereby elect to use the mark-to-market method of accounting under section 475(f) of the Internal Revenue Code for my trade or business of trading securities. The first year for which the election is effective is the taxable year beginning January 1, 2010. • _____________________John Smith

  28. “Mark to Market” Election Form 3115 – filed with return for 2010 John SmithSSN 123-45-6789Attachment to Form 3115 In accordance with Rev. Proc. 99-17 and section 475(f) of the Internal Revenue Code, the taxpayer filed an election with his 2009 income tax return to use the mark-to-market method of accounting in connection with his trade or business of trading securities, effective beginning with the taxable year commencing January 1, 2010. This method of accounting will be used for the taxpayer's books and records and financial statements.

  29. Filing Tips Use separate trading accounts for investing and trading Keep track of your own basis and compare your numbers with those of the trading platform Make sure losses are carried forward from year to year. Call companies directly for tax considerations

  30. Liberty Tax Service Liberty Tax Service has 3,100 offices in the U.S. and Canada for nationwide support. Guarantee accuracy, privacy and free assistance with IRS correspondence Assist businesses that employ undocumented workers Spanish speaking tax preparers

  31. Thank You Liberty Tax Service 718-766-9303 Jonathan@LibertyTax.com