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GreenTraderTax Blog
Expected Tax Changes In 2009

October 30, 2008

*Expected Tax Changes in 2009.
*H.R. 7123, the Middle Class Investor Relief Act, which would increase the limit on capital losses from $3,000 to $20,000.
*Excerpt from Green's 2009 Trader Tax Guide (before editing).
*New IRS rules on adjusted cost basis and holding period.

We discussed these tax topics and current events in the investment management industry in our conference call of Oct. 30, 2008. The recorded archive is available by email request to (put "Oct. 30 call archive" in subject line).

Expected Tax Changes in 2009:

In 2009, I don’t expect much tax change in trader tax benefits, including trader tax status, IRC 475 MTM (ordinary losses), tax treatment on securities versus futures (with 60/40) versus forex, NOL carry backs (being allowed), entities and retirement plans. Presidential campaign and Congressional tax proposals have not mentioned any tax law changes along these lines.

If the 2008 financial crisis and recession get dramatically worse rather than recovering as in a typical historical business cycle, no tax benefits should be taken for granted, including trader tax benefits. I pointed out in the blog article below how things could turn ugly for trader tax status and related tax benefits under certain circumstances. Now on to expected tax law changes.

Unless you make over $250,000 per year, you probably don’t need to worry about significant tax hikes in 2009 and 2010.

In these difficult financial markets, only the best capitalized traders with excellent track records probably need to worry about making more than $250,000 in trading gains per year. Of course, many traders report income over that amount due to spouse income and their own income from other profitable activities.

Here is an overview of tax law change proposals from Obama and Democrats in Congress, versus McCain.

If Obama wins the presidency and Congress wins a super majority – and both are expected in the polls as of this writing – then the Democratic tax change agenda is expected to pass without filibuster from the Republicans.

If McCain wins, there should be more negotiation, but Congress may still be filibuster-proof. So expect the Democratic tax change agenda going forward.

Obama has promised not to raise taxes on people making under $200,000 per year and to give refundable tax credits to all people making under $200,000 per year; regardless if they pay taxes or not. Traders having an off year (or not a big year) may appreciate those tax refund checks.

If you are part of the lucky (or unlucky in this instance) taxpayers who make over $200,000 per year, you may have a tax hike of 9 to 20 percent per year, depending on final terms of the payroll tax hikes and whether you are subject to these payroll taxes hikes (traders are not). Upper-income traders face federal tax hikes of 9 to 11 percent and its expected that states will follow suit on tax hikes too.

Here is the skinny on tax law change proposals.

Obama campaigned for president on repealing Bush tax cuts on the two highest marginal rates, and he also promised to keep Bush tax rate cuts in tact on lower marginal tax brackets; or at least not try to repeal them before scheduled expiration in 2011.

Obama mentioned raising the 2nd highest marginal tax bracket from 33 to 35 percent and the highest bracket from 35 to 39.6 percent. The 2nd highest bracket starts at $165,000 for single taxpayers and $200,000 for married taxpayers; hence the $200,000 amount is highlighted in the media as the cut-off point for the rich. The highest bracket doesn’t start until income of $357,000.

Obama also campaigned on increasing the highest tax bracket rates on qualifying dividends and long-term capital gains from 15 to 20 percent. Although most traders don’t have material long-term capital gains (holding stocks over 12-months), this hike does raise the 60/40 blended tax rate on futures traders.

Obama also proposes phasing back in the social security tax on earned income over $250,000. Most traders don’t have earned income, so this social security tax hike should not hurt traders. Although traders do create earned income within entities for retirement plan deduction strategies, they don’t need earned income over $250,000 to get the maximum allowed contributions. Hence, traders can avoid this social security tax hike.

The Democratic Congress wants an additional surcharge in tax rates of 5 percent on income over $250,000, as part of “pay go” efforts to repeal AMT for all taxpayers. I heard reports that the surcharge would be passed even if AMT can not be repealed. Hopefully, Congress can repeal AMT because many traders do pay AMT when they have futures gains (60/40) and live in high tax states.

Itemized deduction phase-outs add another 1.5% in rates on the upper-income.

Add it all up. 2nd highest income bracket traders will have taxes rise by around 9 percent and highest income bracket traders will have taxes rise by around 11 percent. Earned income taxpayers face an additional tax hike of 5 to 12 percent, depending on how the social security tax hike is phased-in.

Tax strategies for traders if taxes change along these lines:

Many traders did not have a good year in 2008, but hopefully they may have a better year in 2009; when tax rates may rise on the two upper tax brackets.

If you can take more income in 2008, and you normally are an upper-bracket taxpayer, it’s probably wise to do so, as long as you don’t trigger AMT. That will avoid the 2009 tax hike on some of your income.

Conversely, if you have a large trading loss in 2008 with NOL treatment (from IRC 475 MTM), it may be better to carry-forward your NOLs to offset higher tax rates in 2009 (and later years), rather than carry back the NOLs which might invite an IRS exam; which you may want to avoid if you have a weak case on trader tax status in 2008.

Year-end tax planning and filing strategies for 2008 may be more complex and nuanced than in recent years, with significant tax change coming in 2009; so you should consult our CPAs on year-end tax planning this year.

For general year end tax planning, see . We will update this page for 2008 very soon.

H.R. 7123, the Middle Class Investor Relief Act, which would increase the limit on capital losses from $3,000 to $20,000.

On October 20, 2008 the Congressional Research Service updated a report on the tax treatment of capital losses to reflect legislative developments such as the introduction of H.R. 7123, the Middle Class Investor Relief Act, which would increase the limit on capital losses from $3,000 to $20,000. See .

See H.R. 7123 here .

On the 2008 presidential campaign trail, Senator McCain (Rep. AZ) proposed raising the capital loss limitation to $15,000 from the paltry $3,000 current amount; which hasn’t been indexed for inflation or raised for any reason for many decades.

Even $15,000 or $20,000 is still way too low for most active traders. However, it will be good for less active investors and hopefully encourage more participation in the financial markets in taxable accounts; besides just investing in retirement accounts.

Excerpt from overview of Green' 2009 Trader Tax Guide, just submitted to the publisher (before editing):

In 2008, the IRS escalated their challenges/attacks on the usage of trader tax status and IRC 475 MTM ordinary loss treatment. A tax court case decided in August, 2008 (Holsinger vs. Commissioner) raised an Achilles heal argument against trading in connection with only trading on 45 percent of available trading days; as well as some other troubling issues too.

Too many traders are bringing weak cases to tax court, plus they are not defending themselves properly either. Serving up easy wins to the IRS in tax court encourages IRS agents to further attack business traders based on this bad legal precedent. See more on the Holsinger tax court case in Green's December 2008 article for Active Trader; including suggestions for how traders can improve their trader tax status and IRS-defenses.

One IRS agent told me in an exam recently that he felt compelled to deny trader tax status for a “close call” trader in order to protect the U.S. Treasury from having to pay out significant tax refunds on ordinary loss treatment (predicated on trader tax status).

On a macro-level, a change of policy by IRS agents on this front could protect the Treasury from paying out hundreds of billions or even well over a trillion dollars of tax refunds considering the severe bear market decline in 2008.

The Treasury and Federal Reserve have bailed out financial institutions and provided them with special NOL tax breaks too. But will they allow tax breaks for small business traders, even the ones currently on the books?

Unfortunately, small-business traders may be the last taxpayers on the totem-pole when it comes to receiving tax breaks and help from Congress and the IRS.

Both presidential candidates have included campaign rhetoric about bad guys in Wall Street, hedge funds and even small-business traders; especially the ones that shorted financial stocks during the credit crisis.

Significant tax change is coming in 2009, perhaps with some negative impact on business traders. If a recession turns to a depression, don’t rule out Congress freezing trader tax benefits including net operating loss carrybacks; as the State of California did in the recession of 2001.

Congress does not even have to change the law and within existing law the IRS could significantly turn up the heat on traders claming trader tax status (business tax breaks). That’s because the trader tax status rules remain vague and nuanced.

A simple way to deny business traders ordinary loss treatment would be to repeal the 1997 Congressional decision to expand IRC 475 from dealers to business traders too. I am not predicting this and don’t agree with it, but don’t rule anything out if things turn for the much worse.

What you can expect are the tax law changes I cover above. To date, neither presidential candidate or Congress has mentioned any tax law changes that negatively impact business traders.

Not taking care of your trader tax affairs can really cost you. Filing a sloppy tax return with errors in trade accounting (or without line-by-line reporting of securities transactions), or reporting trades on Schedule C (rather than Schedule D, Form 4797 or Form 6781) can initiate a painful tax exam. Once underway, an IRS exam can escalate to an IRS-challenge on your trader tax status in multiple tax years. Learn tips for dealing with the IRS in my November 2008 article for Active Trader.

Trader tax status business expenses generally save a trader up to $8,000 per year in taxes. If business expense treatment is only saving you a few thousand dollars and if you are a very close call on trader tax status, it may be prudent - in this negative IRS environment - to skip trader tax status for 2008.

On the other hand, it’s a real pity to get stuck with a large wasted trading loss, which could be in the tens or even hundreds of thousands of dollars, when you could otherwise have made the necessary timely elections to have IRC 475 MTM ordinary loss treatment (with trader tax status as a pre-requisite), generating full and often immediate federal and state income tax refunds. Unutilized or wasted trading losses are the biggest pitfalls for traders.

This year more than ever, just make sure you qualify for these tax breaks and if you are a “close call” on qualification, it’s wise to consult Robert A. Green, CPA or our other GreenTraderTax CPAs.

It’s also wise to operate your trading business in a separately-filed legal tax entity and also make sure to keep your qualification numbers strong; on trading days, number of trades, hours per day, and very short holding periods. See our entity formation services here .


In 2008, the IRS passed a “close the tax gap” initiative to require brokerage firms to significantly improve 1099-B tax information reporting for transactions in securities.

One reason the IRS is having so many problems with securities traders is because many online and direct-access brokerage firms currently only report the bare minimum of tax information on 1099-Bs; just proceeds on sales of securities and not cost basis, short-term versus long-term gain or loss, option transactions, wash sales and more.

Some online brokerage firms have been issuing more complete supplemental information and tax information reports, but often this information is not entirely accurate or useful for tax reporting purposes.

The new IRS rules require 1099-Bs to also include adjusted cost basis and short-term versus long-term holding periods. But the IRS is still not requiring brokers to provide a complete trade tax accounting, including options, wash sales and more.

Although this is a big step forward, it’s still not the complete tax information a trader needs to simply attach to their tax returns. Plus, the new rules are not mandatory until 2011, and although some brokers will early adopt them, others will not.

Futures traders get summary 1099-B reporting of net (IRC 1256 MTM) gain or loss and it’s very easy to enter that one summary number on Form 6781.

Bottom line, I still recommend good trader industry software or services to download, match and properly account (tax-wise) for your active trading in securities. See .

Some of these providers are integrating their services into brokerage firm platforms, thereby helping the brokers comply with these new IRS rules.

It’s wise to have a trader tax expert review the results and help reconcile tax matters with 1099-Bs and more.

Posted 6 years, 4 months ago on October 30, 2008
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