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Trader Tax Status
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csherman
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stranger
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Reged: 01/11/06
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Posts: 2
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Trading IRA account
#522 - 01/11/06 03:51 PM
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I "trade" from both my margin and IRA brokerage accounts. I prefer to make short-term trades from my IRA where possible, to allocate ordinary income to the IRA. I make a varity of trades from my margin account, including short-term trades in stock and trades that cannot be done in an IRA (most option transactions, short sales, etc.).
My question is whether the IRS would be open to taking my trading in the IRA into account in determining my "trader" status. Is there any authority on this issue?
Thank you.
csherman
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Re: Trading IRA account
#528 - 01/12/06 07:09 PM
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I'm not an authority, but everything I've read from this site says to be careful not to overdo trading in an IRA. It's against regs to run a business in an IRA, so by bringing it to the IRS's attention you could lose the IRA's tax-exempt status.
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csherman
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stranger
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Reged: 01/11/06
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Posts: 2
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Re: Trading IRA account
#529 - 01/13/06 05:50 AM
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Thanks. That's a very interesting point you make. Actually, one is not generally prohibited from conducting a trade or business in a retirement account or other tax-exempt entity, but the income from the business is subject to the UBTI (unrelated business taxable income) rules if the business is unrelated to the exempt purpose of the tax-exempt entity. I don't believe there's any authority on whether securities trading is unrelated to the exempt purpose of a retirement account, and there would be risk, as you note.
csherman
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Re: Trading IRA account
#530 - 01/13/06 07:20 AM
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Good questions and discussion here.
If you run a business in an IRA, it can trigger unrelated business taxable income, which defeats the purposes - becaue then you have taxable income subject to tax. You also may trigger prohibited transaction and self dealing penalties.
Active trading will rarely incur IRS questions about running a business. So it is a good idea to trade in a retirement account to build up tax-free gains until you take taxable withdrawals. It's permenantly tax-free in a Roth IRA. Learn more here http://www.greencompany.com/Traders/TraderRetirement.shtml.
You can't achieve trader tax status - business tax treatment - from the activity you have in a retirement account. Trader tax status only looks to your taxable account activity.
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Robert A. Green, CPA & CEO
GreenTraderTax.com
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