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The Business of Forex Trading

  • #1
  • First Post: Jun 14, 2009 2:56am Jun 14, 2009 2:56am
I am starting this thread in order to explore business aspects of trading forex for a living. Stuff like:

1) Forms of business
2) Taxation issues
3) Trading with other peoples' money
4) Team trading
5) Trading with employees
6) Etc, as in anything related...

Before I even began live trading I formed an S Corporation to cover any profits or losses I might incur. I have some profits, so far - woohoo! But I also have expenses (losses), like:

- at least $500 spent on trading-related books
- a nice new HP desktop pc, dedicated to trading only, $1500
- a 40" Samsung HDTV, serves as a monitor for the bitchin desktop (hey, I can get 6 nice-sized charts on there!), $925
- well, lets see, a reasonable fraction of the rent/utilites I pay for office space ($750/month total)
- There should be more - if there is a cool forex seminar this coming winter in Miami, or Bangkok, then I will not want to miss that...

I love write-offs.

The S-corp is a good way to go. If there are any profits left over after your (perfectly reasonable) business expenses then you can pay yourself a nice dividend & avoid the self-employment tax...I do need to find out more about the tax-related implications of trading income, though....

So, do any of you trade for a living? (I know you're out there!)

How do you deal with taxes? Do any of you trade in partnerships? Do any of you have employees? Who has the goods on the off-shore corporation route?

Have any of you started funds or other vehicles to trade for other people - with other peoples' money?

I would like to hear your stories.
"If The Fool persists in his Folly he will become wise." - William Blake
  • #2
  • Jul 3, 2009 3:37pm Jul 3, 2009 3:37pm
very good advice, the fool, thanks for the heads up
The Chonchy
  • #3
  • Jul 23, 2009 3:03pm Jul 23, 2009 3:03pm
Hey Fool: Since we are almost at the end of the week, give me a day or so and I will write a long article for you. Must focus on trading....
  • #4
  • Jul 23, 2009 3:19pm Jul 23, 2009 3:19pm
Quoting pip pirate 2
Hey Fool: Since we are almost at the end of the week, give me a day or so and I will write a long article for you. Must focus on trading....
That would be awesome & much appreciated. Looking forward to it anytime.
I have lots of questions but they are probably very basic to you so I will hold off on them til later.


Thanks & happy trading.
"If The Fool persists in his Folly he will become wise." - William Blake
  • #5
  • Jul 24, 2009 9:01am Jul 24, 2009 9:01am
Fool: I am not a CPA, but have done my homework. Ask away today and I will try to answer.
  • #6
  • Jul 24, 2009 4:36pm Jul 24, 2009 4:36pm
Quoting pip pirate 2
Fool: I am not a CPA, but have done my homework. Ask away today and I will try to answer.
Hi Pip Pirate and thanks for entertaining my questions.

I currently get most of my income through an engineeing consultiong business that operates as an S-Corp. I take out money as it comes in and give it to myself as a dividend and I pay taxes on that income as a dividend and so get away from paying the self-employment tax. I assume I will do the same thing with profits from the S-corp I formed and under which I do all spot forex, futures, and stock trading. I daytrade forex and futures but not stocks. Spot forex is the biggest part of it.

1) What would be the best way to lessen the tax burden for myself?
2) Can I claim the spread that I pay on every trade a "loss" or an "expense"?
3) All of my accounts (4 total) are with US-based brokers. I would like to have some foreign accounts, though (UK and Switzerland.) I am thinking about whether I should denominate earnings in those accounts in GBP and EUR, or perhaps CHF? Will this necessarily be much of a complication at tax time?
4) If I get really successful, I had thought I would form a corporation in another country in which I might invest to gain residency status or citizenship (Costa Rica & Panama come to mind.) Am I correctly assuming that any income I earn trading from a foreign corporation and for which I pay taxes in that foreign country - will not be taxed again in the USA?

Well that's enough for now. Thanks for any help or comments.
"If The Fool persists in his Folly he will become wise." - William Blake
  • #7
  • Jul 24, 2009 7:34pm Jul 24, 2009 7:34pm
Fool you think like I do. First of all, once again, I am not a CPA, don't play one on TV, so I am going to do the best I can. You have some questions that need to be answered by a CPA that specializes in forex trading. There are only a few in the country.
Let me start with some general information. It is important to know that the IRS doesn't have clear, easy rules for traders, especially forex traders on how to fill out tax forms, what type of business to be in, what is a trader vs an investor. CPA's have compiled some rulings and previous IRS codes to make their case for how the IRS should look at a trader for tax purposes. Let's start at the beginning. First you have to prove to the IRS whether you are an investor or a trader. There are no clear guidelines. Remember this: It is your job, not the IRS's, to prove your case for tax breaks and savings. It makes it harder when the IRS has no clear rules. It is generally agreed that a trader is someone who makes a trade everyday or two, works 4 hours a day or more at trading, has a trade journal, has no other full time employment, and can prove all of this at an audit. I am a trader, and have trade journals to prove it, by writing down during my trading times the price of 13 forex pairs. I have a notary certify a letter every year which shows that I have these trade journals listed that I have used that year (so that I don't make them up if I had an audit). Most fx people are investors, not traders, in the eyes of the IRS. You might have a hard time proving that you are a trader, working 4+ hours a day. All the tax breaks go to the professional trader, not the investor. Investors can only fill out schedule C and D forms as self employed. Sorry but investors get tattooed. If you are a trader, forex income is considered passive income and there is no self employment tax due. You can't use forex income to fund any type of IRA or 401(k). You read earlier about how you are taxed as a trader.
  • #8
  • Jul 24, 2009 7:53pm Jul 24, 2009 7:53pm
Next you don't need to set up any type of business organization, whether S, C corp, LLC, or partnership until you are making $10k a year or more, in my opinion. It doesn't make sense to pay annual fees to the state for the corp, and pay a CPA to do your corp and forex taxes (CPA's charge big bucks, like over $700 to do fx taxes), when you aren't making that much money. In my state, CA, a general partnership is the easiest after it is set up for tax purposes. Once you do set one up, your risk of being audited are around 0.4%, compared to 3-4% as a Schedule C self employed person.
Question #1. The best way to help with taxes is as I have explained above with some type of business model.
Question #2. As far as I know, you can't claim the spread as an expense. My CPA has never done that.
I have sent you a PM for the rest of the questions.
  • #9
  • Jul 24, 2009 7:58pm Jul 24, 2009 7:58pm
Quoting pip pirate 2
Fool you think like I do. First of all, once again, I am not a CPA, don't play one on TV, so I am going to do the best I can. You have some questions that need to be answered by a CPA that specializes in forex trading. There are only a few in the country.

Thanks, Pirate. I don't think it will be hard to prove that I am involved in forex trading 4 hours a day. Of course, if/when I grow a big account I'll just need to check in for a few minutes a day to close my hugely profitable trades. But by then maybe I'll be trading from the shelter of a friendly foreign country.

Actually, I have never had a problem paying my taxes & I have done the preparations myself. I pay less taxes from the S-Corp (and have better bennies) than I ever did as an employee.

Going this route, though, my Social Security share is going to be minute by the time I retire....
"If The Fool persists in his Folly he will become wise." - William Blake
  • #10
  • Aug 1, 2009 8:24pm Aug 1, 2009 8:24pm
http://www.tradersaccounting.com/index.php

These folks specialize in helping traders. I'm pretty sure they are one stop shop and there is thread on FF somewhere where a rep from the company was answering questions.

** I'm not affiliated with them and I'm not a customer ** Just not to that point yet. But I have been reading to learn more so when I do get there I'm ready.


There are some specific requirements in order to meet "Trader Status" under IRS rules (which the IRS doesn't even understand). Every trade has to be documented as either a 988 or 1256 to figure out what tax rate. Forex is a different animal from commodity trading. There are like a million on one details to be concerned with. Plus the IRS is getting more aggressive with S Corps and then you have all the new Socialized health care laws, you may have to make some serious changes once that is said and done.

I've read a little bit here and there, I'm no expert by any means and anything I've posted maybe wrong. But it maybe a good idea to research these things if you haven't already.
Don't wish it were easier, wish you were better. ~ Jim Rohn
  • #11
  • Aug 1, 2009 8:58pm Aug 1, 2009 8:58pm
Quoting LasVahGoose
http://www.tradersaccounting.com/index.php

I've read a little bit here and there, I'm no expert by any means and anything I've posted maybe wrong. But it maybe a good idea to research these things if you haven't already.
Thanks, LVG. I am going to take profits from this first year of daytrading, but they will not be very high because I intend to try to compound and grow several trading accounts. What I usually do on other S-Corps I own is pass through some profits to myself as a dividend and thereby avoid paying the self-employment tax on it. Otherwise, it takes money to run a business and those expenses can really add up. I drive a company car from the engineering business I own but I see no reason the trading company should not have a nice new car, too. You got to take a satchel fulla money to the bank every week you don't want to show up lookin like no slub. (...jk)

Back when the RE market was booming around here I was on the verge of doing a deal to design/build a small office building with office condos to sell. That's on the back burner, but still an example of some real assets a Corporation can own. Somebody I know has been trying to get me to invest in their startup forensic engineering business and if I had an excess $100k right now, I would do it, because those businesses can make sick profits if they get lined up with the right pitbull attorneys. No reason why the trading company couldn't hold some shares in that asset, either. Diversification in real asets is the name of the game.

I have never had a problem with the IRS and to tell you the truth, I have found them to be quite forgiving. When I first got started in business over a decade ago, I did some pretty stupid things re: my tax returns and they hit me with some penalties that were quite high. I wrote them a contrite letter and they waived them all. I am probably just too small to be worth their while to harass and I intend to stay that way through diversification.
"If The Fool persists in his Folly he will become wise." - William Blake
  • #12
  • Aug 1, 2009 8:58pm Aug 1, 2009 8:58pm
Quoting The Fool
Hi Pip Pirate and thanks for entertaining my questions.
Quote
4) If I get really successful, I had thought I would form a corporation in another country in which I might invest to gain residency status or citizenship (Costa Rica & Panama come to mind.) Am I correctly assuming that any income I earn trading from a foreign corporation and for which I pay taxes in that foreign country - will not be taxed again in the USA?
You cannot escape the IRS unless you renounce your U.S. Citizenship.
Don't wish it were easier, wish you were better. ~ Jim Rohn
  • #13
  • Aug 1, 2009 9:02pm Aug 1, 2009 9:02pm
Quoting LasVahGoose
You cannot escape the IRS unless you renounce your U.S. Citizenship.
You can have dual citizenship, fairly easily in a number of countries. Also, "You" are independent from any corporate entity you make hold shares in, and if that entity is taxed in another country, and you pay those taxes in said other country, then the USA has nothing to say about it. "You" may still derive considerable benefit from those corporate assets even if 'you" never derive any income from them.
"If The Fool persists in his Folly he will become wise." - William Blake
  • #14
  • Aug 1, 2009 9:02pm Aug 1, 2009 9:02pm
Quoting The Fool
Thanks, LVG. I am going to take profits from this first year of daytrading, but they will not be very high because I intend to try to compound and grow several trading accounts. What I usually do on other S-Corps I own is pass through some profits to myself as a dividend and thereby avoid paying the self-employment tax on it.
You really want to read up on Trader Status. Spot Forex and Taxes are a very different animal and very complicated. I'm just saying if it was me, I'd do a lot of homework. I've read enough to know the rules and the game are completely different.
Don't wish it were easier, wish you were better. ~ Jim Rohn
  • #15
  • Aug 1, 2009 9:03pm Aug 1, 2009 9:03pm
Quoting The Fool
You can have dual citizenship, fairly easily in a number of countries. Also, "You" are independent from any corporate entity you make hold shares in, and if that entity is taxed in another country, and you pay those taxes in said other country, then the USA has nothing to say about it. "You" may still derive considerable benefit from those corporate assets even if 'you" never derive any income from them.
If you are a U.S. citizen and make any type of income anywhere you are liable to the IRS. Whether or not it is "you" or a "fictional you".
Don't wish it were easier, wish you were better. ~ Jim Rohn
  • #16
  • Aug 1, 2009 9:10pm Aug 1, 2009 9:10pm
Quoting LasVahGoose
If you are a U.S. citizen and make any type of income anywhere you are liable to the IRS.
I'm not sure you understand what a corporation is. The US government can levy no tax on a foreign corporation; how could they? I don't necessarily need "income". I want to have interest in "assets". As a shareholder in a foreign corporation, the US government has absolutely nothing to say to me about any interest I may hold in a foreign corporation as a citizen of that foreign country.
"If The Fool persists in his Folly he will become wise." - William Blake
  • #17
  • Aug 1, 2009 10:01pm Aug 1, 2009 10:01pm
Quoting The Fool
I'm not sure you understand what a corporation is. The US government can levy no tax on a foreign corporation; how could they? I don't necessarily need "income". I want to have interest in "assets". As a shareholder in a foreign corporation, the US government has absolutely nothing to say to me about any interest I may hold in a foreign corporation as a citizen of that foreign country.
Would you still need to file a Form 5471? I don't know, you maybe correct.

Certain US persons who are shareholders, officers or directors of a foreign corporation (or international business company) may be required to file this form.

1. A US person who is an officer or director of a foreign corporation in which any US person owns or acquires 10% or more of the stock of the foreign corporation.
2. A person who becomes a US person while owning 10% or more of the stock of the foreign corporation.
3. A US person who had control of a foreign corporation for at least 30 days.
4. A US shareholder who owns stock in a foreign corporation that is a controlled foreign corporation for an uninterrupted period of at least 30 days and who owned that stock on the last day of the that year.
Don't wish it were easier, wish you were better. ~ Jim Rohn
  • #18
  • Aug 1, 2009 10:30pm Aug 1, 2009 10:30pm
Quoting LasVahGoose
Would you still need to file a Form 5471? I don't know, you maybe correct.

Certain US persons who are shareholders, officers or directors of a foreign corporation (or international business company) may be required to file this form.

1. A US person who is an officer or director of a foreign corporation in which any US person owns or acquires 10% or more of the stock of the foreign corporation.
[font=arial]2. A person who becomes a US person while owning 10% or more of the stock of the foreign corporation....
Well I appreciate your input & I am not sure of anything and will be doing all DD if/when I go down that road. I might be correct in some assumptions but i might be dead wrong. The point I am trying to make (finally) is that I would not go that route as a "US person" but as a citizen of the foreign country where the foreign corporation would reside.

The latter point is important, since:

a) while the investments that some foreign countries require to allow you to gain residency & then dual citizenship are not necessarily large, they are not trivial eiher, at least not to me. And this I need to catch up on. Used to be Costa Rica, for example, had a program allowing you to gain residency status with a $60,000 investment in an enterprise in certain economic classes (tourism, reforestation, etc).

b) I am not sure I would want to have anything to do with any particular foreign government, I am also not sure if the benefits would outweigh the hassles.

I am just scratching the surface and hope more knowledgable traders who have been down this road might weigh in here.
"If The Fool persists in his Folly he will become wise." - William Blake
  • #19
  • Aug 1, 2009 11:50pm Aug 1, 2009 11:50pm
Quote
The point I am trying to make (finally) is that I would not go that route as a "US person" but as a citizen of the foreign country where the foreign corporation would reside
.
I hear ya (I don't want to press the issue, but I will make this my final post on the topic) and my point is unless you renounce your U.S. citizenship you will always be a US Person (which includes corporations). BUT, getting someone that knows this stuff, like you said, is key. I'm not an expert, so hopefully others that have traveled down this round will have some input.

Quote
I am just scratching the surface and hope more knowledgable traders who have been down this road might weigh in here.
yeah, I'm here to learn as well and hopefully this thread will get some momentum. All the issues from the first post are important. I know once I get to a point where it makes sense to have S Corp I will get that going. No point in paying Social Security, since it will be insolvent long before I'll get chance to collect what has already been put in.


I forgot about this website as well, lots of info to search as well.
http://www.traderstatus.com/trader.htm
Don't wish it were easier, wish you were better. ~ Jim Rohn
  • #20
  • Aug 1, 2009 11:51pm Aug 1, 2009 11:51pm
From what I remember, if your total income for a year exceeds $80,000, you have to pay taxes to the IRS, regardless of what your source of income was and where you lived, as long as you are a US citizen. And, if you decide to give up your US citizenship, you will have to pay taxes for 10 years after your citizenship is revoked.

Not to offend anyone here and I don't have anything against the US, but I live in the US, and am neither a citizen nor a permanent resident. I was considering taking up residency, and eventually citizenship, but didn't like the idea that I'd be on the hook for the trillions and trillions of dollars in debt. Why should I pay for other people to drive around mindlessly in cars instead of using public transportation (cash for clunkers), healthcare, Wall Street Bailouts, stimulus checks etc? When I was going to school here, i was not eligible for any financial aid, and now if I lose my job, I don't get any unemployment benefits. But, when it comes to taxes, I pay as much as a citizen. I plan on going back home with an fx account balance of 100k, and as long as the account is maintained outside my country, I wont have to pay taxes on it.
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