There are some definite advantages to trading within an entity, utilizing mark-to-market accounting.
- Wash Sales Rule does not apply
- Capital Losses not limited to $3000 per year
- Maximizes deductions
- Shares your income with another taxable entity
There are corporations that specifically focus on establishing trading entities for individuals as well as do-it-yourself resources.
As a trader, however, you must be aware of the flip side of the coin. There are basic expenses that you will incur through your business. And, if you set up a medical-reimbursement-plan (MRP) you will be able to fund your medical out-of-pocket expenses with your trading gains. This reimbursement via the MRP and the expenses can be quite heavy and will need to be covered by trading capital. So, the trading account needs to be well capitalized from the beginning.
A local trader I know approached me recently asking for my opinion. He said, “I’d like to work toward quitting my job and trade as a full time business. How much do you think I’ll need in capital to be able to pay myself $100,000 per year from the business?” He didn’t much like my answer, but I would not feel comfortable doing that without a minimum of $750,000 in trading capital from which to start! After all, even with that much capital initially invested in the business, removing $100,000 is essentially saying “I can make 15% per year.” Let’s face it. Most fund managers would be thrilled to generate those returns! Can you succeed with less than that to start? Yes, but you may need to adjust your salary expectations.
The old adage “It Takes Money To Make Money” appliesto the stock market, too! A trader/investor is far better off generating income from another source and preserving their trading/investing capital for further trading/investing.
If you’re considering forming an entity through which to trade, do your homework. Ask lots of questions, and talk to others who have already made that leap.
Emilu Bailes
OptionsANIMAL Instructor
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