In this episode of Coffee with Carl, attorney Carl Zoellner talks about qualifying as a trader with the IRS, why stock traders need an entity structure in place, and the advantages of structuring your brokerage account.
Updated September 21, 2021
Stock trading might not involve a lot of liability. After all, no one’s going to slip on one of your shares and sue you. However, there are still important reasons traders should create an entity structure.
Firstly, creating an entity to hold your brokerage account (preferably an anonymous entity) adds a layer of asset protection. Brokerage accounts are attractive to plaintiff attorneys, so it’s wise to have them inside an entity.
Additionally, another major benefit of trades using an entity (specifically, a corporation) is preferred tax treatment. Taxes on stock and options sales are already complex. There are some tax benefits for those who qualify as a “trader” with the IRS. Unfortunately, these benefits are hard to access because it is difficult to qualify, even if you make thousands of trades a year. Instead, traders should make sure to have a corporation in their business structures. When it comes to taxes for stock traders, those who set up corporations get all the same tax benefits as qualified “traders” in the eyes of the IRS. These benefits include the ability to deduct expenses that you otherwise would not be able to claim as an individual (like cable, internet, equipment, etc.) and start-up educational expenses.
The structure I recommend for traders is to use an LLC and a corporation, making sure to have guaranteed payments to the corporation. With this structure in place, you’ll be able to bypass qualifying as a trader and still capture those deductions.
Watch as Carl explains the best entity structure for stock traders to take advantage of the corporate tax code and deduct expenses without qualifying as a trader with the IRS.
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