For US based Quants, was curious if any of you have been qualified by the IRS as a Trader in lieu of Investor for tax season - based exclusively on Algo trading? Did you need to register this activity as a business or claim self-employment to accomplish this?
Without getting into the additional complexities of accounting on trades, there are significant tax benefits to being qualified by the IRS as a Trader, which permits additional tax deductions on trading losses beyond the $3000 limit. Traditionally, this qualification applies to day traders manually executing several hundreds/thousands trades per year, and spend a significant amount of time per week trading, often in a self-employed or full time capacity. Everyone else falls into the investor category, which includes everything from buy/hold investors to active swing traders and portfolio managers investing as a side income.
I have full time employment outside of trading, but intend to algo trade with a scalping style that could generate several trades per day that could amount to hundreds/thousands trades per year. I would be designated as a Pattern Day Trader by my brokerage in accordance to FINRA, and my trading algo would be active throughtout the market week all year. It would be likely that I would need to devote 20 hours per week to this activity, mostly in a development capacity rather than manually executing trades myself. Without speculating on trading success, annual profits from this activity would only be a fraction of my primary employment income. If this activity were to exceeed my employment income, then that is a good problem to have!
OkiTrader
I am going through the same process. After reviewing the options, I think it is best to create an LLC. Here is an article you may find interesting.
https://www.investopedia.com/articles/trading/09/incorporate-active-trading.aspÂ
Derek Melchin
Hi Eugene,
After reading the link above, there seems to be several benefits to setting up an LLC. However, as the conclusion notes, it's best to consult with professional advisors when it comes to this topic.
It should be pointed out that an account under PDT can only make 3 day trades in a rolling 5-day period. So the strategy explained above that trades several times per day will need to be adjusted before deployment to ensure compliance with FINRA.
Best,
Derek Melchin
The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.
CAPOCAPITAL
Eugene - Thanks for the link, after looking into it further I agree a LLC or similar trading entity is probably the best path.
Derek - The PDT restriction from FINRA applies to brokerage accounts with a total balance less than $25000. For brokerage accounts above $25000, there are no PDT trading restrictions but the account will be classified either way as a "Pattern Day Trader" if it trades more than 3 day trades in a rolling 5 business day period. I believe this is for classification purposes only, in the event a PDT-flagged account cash balance dips below $25000, the PDT trading restrictions will apply.
Derek Melchin
Hi CAPOCAPITAL,
Thank you for clarifying the PDT restrictions.
Best,
Derek Melchin
The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.
CAPOCAPITAL
The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.
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