Are you a trader in the united states who banked huge lamborghini money from stocks, cryptos or options last year? Great? If you did then brace yourselves april is going to be quite dreadful because taxes, oh taxes, now i know some of you might be saying. Oh my gosh yay. What do you know about the taxes in the united states with the irs you're stuck up there in the canadian igloos drinking maple syrup you're? Not even american - and you are absolutely right about the maple syrup too, and that's why, in this video, i've invited a special guest, a trader tax cpa in the united states, brian rivera, hey everybody. Thanks for having me, i'm going to be asking brian a lot of tax questions for all of you.

Traders in the united states on some key topics, such as how to qualify for trader tax status and avoid wash sale rule. How can a trader maximize tax deductions and form an llc to save even more money on taxes and many many other topics? So if you want to learn how to keep more trading profits in your pocket, make sure to watch the entire video and don't forget to drop a like at the bottom of the video, it's absolutely free to do so. I'm like paying for taxes, hi brian thanks for joining me today and and brian you're, actually the first guest we ever had on the humble trader the channel here. Thanks for having me that's awesome, i feel honored yeah and i'm so glad like.

You know that i found you, i found your channel as a cpa in the state to be able to come in and talk about taxes as a professional and to help traders and think about how to save on taxes absolutely yeah. So that's definitely something that uh. That i've been doing for since 2014, and so anyway i can add value to the trading community. I'm always for that.

So so, really quick here um just to i'm sure this is a top of the question for everyone, all the traders in the states thinking what is the best way for active traders in the us, whether they're swing traders or day traders to save on taxes. Yeah. That's a great question, and so you know a lot of times. What will happen? Is people will jump in the stock market? They'll either have early success or they won't and they'll think about taxes as an afterthought and so usually um.

You know step one that i always recommend is that they understand what it means to be an active trader in securities and that's just because the irs has guidance out there, um that, if you qualify, then you'll be able to strategize and and two of the things That you'll be able to do is one is you'll. Have the ability to write off your business expenses so a lot of times new traders getting into this profession will experience some costs like education, software fees, locate fees, stuff like that, and then the second piece of that is mark to market accounting, which we'll probably touch On here shortly, okay, so is this qualification because i've been hearing a lot of traders, i trade with talking about this trader tax status. Could you talk a little bit about that and and what how exactly do you qualify for it yeah, so trader tax status is basically um. It's a baseline of how you know if you qualify so the irs.

If you actually read the guidance, it's irs tax topic. 429, and if you actually read it, it doesn't make any sense and so how we've tried to simplify it within our firm, and this is what all of our associates do when we get a tax client in or a trader client is we run them through? Something called the behave test i just love acronyms and so b stands for business expenses customary to a trader. So what we'll do is we'll look to make sure that hey are your expenses reasonable and necessary, and does this align with what's acceptable in the industry? Secondly, we'll look at e stands for equipment, so that's basically uh equipment used in trading and so a lot of times, traders trade from a laptop cell phone. They get all to the point where they have multiple multiple monitors.

Um and usually you know that i see that on the on the for the scalp traders, especially h stands for the hours in the market and so usually as a trader, you got to have at least four hours in the market. What's that bhe a stands for average holding periods, average holding periods is basically you're holding periods of the stocks that you're holding should not exceed 31 days, and that's just because we want to see regularity and continuity. The v stands for volume, so the volume of your trades needs to be at least 720, so how we look at a trade is based on transactions. So, if you bought 500 shares of tesla, you sold 500 shares.

That's two trades. Now, if you scale in, let's say you break it up into orders of 100, then all the way up to 500. That would be five on the buy and then five on the sell. And then the last piece is e, which is the extent at which you trade, and so what that means is.

Basically, you got to have a trade on at least 75 percent of open market days, so the stock market is open 252 days on the year. So 75 percent of that would be if you meet all those criteria - you're, basically there in qualifying as a trader. So that means, if i'm in the us and i qualify for trader tax status, then i can write off all the trading deductions correct. As long as those deductions are reasonable and necessary um then yes, you can write off those expenses against your net short-term trading gains, and that also means, if i don't qualify, then i cannot write off any of the expenses and the losses are only capped at 3.

000 right per year, yeah - that's partially correct. So if you don't qualify as a trader in security or active trader, then you won't be able to write off your business expenses and then also, if you don't qualify as a trader, then you're in what's called capital loss territory. So let's say you lost ten thousand dollars, then you can write off three thousand against your other income and you have a capitalized carrier forward of seven thousand dollars. Now the capital loss criteria, it really is only applicable if you're, not a mark to market trader, and so one of the conditions of being a mark-to-market trader is first, is you have to qualify for trader status, so you have to get that out of the way And then the second step is, you got to make sure you have an election on file because you could qualify as a trader but not have an election and in that situation, you're still stuck with three thousand dollars in losses.

This is only the second question in and my head is like ready to explode. Oh my god, trader tax is so complicated, so we just talked about qualifying for trader tax status and i think that's great for traders and being able to optimize more deductions. But what about forming an llc, because i do see a lot of traders asking me that in the comments section when do you think, would be a good time for active traders to form llc, and why would that be beneficial for certain high income traders? You actually partially answer that question. So a good time for a trader to start thinking about an llc is there's a couple situations, but one is you're.

Looking for additional deductions that you can't get as an individual. An example of those two would be the ability to contribute to a retirement plan, specifically a solo 401k, which for 2022 allows sixty one thousand dollars in contributions. The second piece is the ability to write off your your health insurance. So those are two deductions.

You can't get if you're not inside, of an s corporation or an llc tax as an s corp. So that would be two reasons why um and there's other things that we can also do inside of those entities. But i don't want to confuse you for the purposes of this. This question yeah.

Okay, thank you for helping me not explode. My head and another question. I hear a lot of traders ask me is wash sales and they are saying. Oh, it's like a nightmare to track it.

What's the advice you would give as a cpa to for traders to navigate around this yeah. That's a great question and you know the last two years i would say: there's been a boom in the retail market and a lot of people got a rude awakening on what this watch sale, rule means and so very high level. What a wash sale is is any time you take a loss on a trade and you turn around and buy that same stock or trade that same stock in a 30 day window irs basically says hey, that loss is disallowed for tax purposes and it gets added To the cost basis of your very next trade, and so it's normally not a problem, if you're a trader that, let's say you don't trade, the same names over and over, but if you're a momentum trader, let's say you: trade, tesla, every single day or you're, going To flag wash sales all across the board, so as a trader, how you keep yourself safe is two ways: first way is: is if you're not a mark to market trader, then you need to sit out of that name for at least 31 days. The window is 30 days, but i say 31 days to be safe, so either a you stop trading, that name in the month of december, to let the wash hill period cool off or you don't touch that name in the month of january, because wash sales are 30 days before and 30 days after, the second way you can protect yourself is, you can elect, what's called section 475 mark to market accounting, and so what mark to market accounting does? Is it changes the nature of your tax reporting? So now you no longer have wash sales and your gain and loss is realized as of the end of the trading day and and how hard is it to elect that mark to market accounting? It's not hard at all.

It's it there's two ways to do it uh, so the first way is, let's say, you're a trader and you trade under your social security number as an individual. Well, you have to make the election ahead of time so we're in 2022, and so, if you want to be a mark to market trader for 2022, you need to have an election statement filed with your tax return by april 15th. You're just notifying the irs you're. Just telling them hey, i qualify as a trader, i'm electing mark to market this year, you're going to sign that and file it with your tax return or extension by april 15th you're going to send it off once you do that, you'll contact, your broker.

You'll say: hey, e-trade, hey fidelity, whoever you trade out and you say: hey i qualify as a trader. Please update my tax report. That's all you got to do for this year. Then, when you go to file your 2022 tax return, what you're going to do is you're going to complete that process by filing, what's called a form 3115 application with your 2022 return that goes that gets filed next year.

Um you file that with your tax return and then you send another copy to the irs national office. That's all you got to do now. If you're a brand new taxpayer. Let's say you created a new entity in february.

Let's say you decided, you know what i'm killing it, i'm crushing it i'm ready to be an llc. Well, you could elect it the day the llc is open. All you got to do. Is you put a memo in your corporate records? You sign it.

You file it away and when you open up your brokerage account under your llc, you just tell the broker: hey, i'm a mark to market trader and you're set up from day one, and you don't have to do everything that i just said: you're good to go With the brand new entity, so traders keep remember what what brian just said april 15th of this year. Right is the deadline to like mark to market accounting, exactly okay, very important, because uh it would suck to not be able to trade the same tickers within 30 days, and also does that mean, if i elect mark to market accounting? Would that allow me to kind of recognize all the losses i took prior to that yeah, so, unfortunately, the way the mark to market election works, it isn't on a go forward basis, and so anything that happened up to the year that you filed mark to market. Unfortunately, you can't retroactively adjust those losses. So if you remember how i mentioned earlier, there's there's something called capital loss treatment.

So let's say you were day trading for three years and you accumulated a hundred thousand in day trading losses and you decide hey. I just learned about this mark to market. I want to elect it when you elect it. It's not gon na change.

The hundred thousand dollar losses that you had you're gon na recognize three thousand dollars every single year until that's used up so a lot of times. What i'll tell traders is if they have that market tuition and they have big losses? What you want to do is you want to get out of that capital loss hole first, because that's a tax benefit to you. Although you have losses, it's also going to offset all your future income, then, once the losses are used up, then you elect mark to market and you're protected going forward. Brian, let's say i made a killing trading gamestop amc in 2021 with all the warship bet, hype and all the movements, i'm sure a lot of traders made a ton of money and if i want to pay no taxes, how do i do that um? You know.

I would say that you know with the tax year already being over, it's really hard to tax plan after the fact um and so usually, tax strategy. Tax planning happens outside of tax filing seizing, and so that's why it's really important. You always maintain a relationship with your accountant or your cpa, firm yeah and then the thing is trading. Is it's unpredictable? So one quarter you can have a great year or a great quarter, then the second quarter.

It cannot be as good. So it's kind of it's very volatile, just like a stock chart, but at the end of the year you might say whoa and take a step back man. I did a really good job, but as long as you can catch that before we cross the end of the year, you know then there's still some stuff that we can do for you. But if you wait until it's time to file your taxes, that is not the time to tax plan.

Is that why a lot of baller traders move to puerto rico, to pay less tax yeah? So puerto rico has probably some of the best regulation for traders and investors. So i have a lot of clients that have gone there. I have a lot of clients that have came back after going there and making a killing, and the reason behind that is puerto rico has a statute which is called act 60. and basically, what act 60 is is it's you establishing permanent residency in puerto rico and There's a couple other um: what's the word standards or regulations that you need to hit, but as soon as you establish permanent residency from that point forward, you pay zero percent on all of your capital gains.

So, if you're, somebody who is mobile, somebody who is not attached to your state and you're free to go wherever i highly recommend going to puerto rico, because that is the ultimate tax strategy. In that any money you make from investing is going to be taxed at a big fat: zero, zero, zero percent. Yes, zero percent. As a cpa, do you get a lot of people complain or just rant to you about oh they're, making a lot of money, but it feels like the government is taking everything away and how would you respond to that yeah, so you know, unfortunately, that is a Very popular uh complaint that i that i receive, and so before we try to address the problem is i always like to level set, and i always just say: hey man for every trader: that's banking.

There could be five or ten. That would gladly switch positions with you, so if you're in a position where you actually have to pay tax, consider yourself blessed and once you once you kind of have that mindset. It's like man, you know i'm actually blessed. I can work in my underwear.

I can day trade in my office. I can do all these things you're blessed right and then from there. It's like. Okay.

Now, let's find a special specialized firm like us to see what can we do to start chipping away at that money to make sure that you're not giving uncle sam more than you need to, but it's an honor to pay tax? It's just you know. What can we do to bring that number down yeah? I agree with that because it means, if you're having to pay a lot of taxes, means you're at a higher tax bracket. I would much rather be you know, making four hundred thousand dollars and have to pay. Let's say two hundred thousand dollars in taxes and making 50 grand and only have to pay, let's say: 10 000 in taxes.

I think i think we have to put everything into perspective right right, absolutely agree. 100. Thank you brian, for coming in today and answering so many of these frequently asked questions from traders. Absolutely you know these questions were hard, but it's been my pleasure to to answer those and for anybody else.

That's looking for more content around entrepreneurship, personal finance, day trading, investing feel free to check out my youtube channel brian rivera cpa and we'll catch you at the next video thanks. Brian, have a good one traders, if you got anything from this video, if you learned about how to save lamborghini money, then make sure to drop a like at the bottom of the video. It really took brian, and i a lot of time and planning to make this happen so feel free to check out brian's youtube channel for even more resources on taxes. Thank you guys so much for watching.

As always, i'm the humble trader and i'll see you guys. Next time you.