TRADERS
PROPRIETARY TRADING
Proprietary Trading Firms
Whether you are joining a firm, creating your own, or doing business with a proprietary trading firm, we have all the services you need. From consultations, to review and/or creation of the legal agreements (LLC Operating Agreements), to preparation of your federal and state tax returns (for your proprietary trading firm and its members, or your return if you are just a member).
Many traders are interested in job offers from proprietary trading firms. These offers often allow traders who are low on their own trading capital the opportunity to trade the firm's much more substantial capital (in a sub-account). Traders are offered 80 percent of their trading gains in the form of a Form 1099-Misc. compensation or an LLC K-1. The only risk for these proprietary traders is any capital they are asked to deposit or contribute to the firm. These offers sound great, but there are many complex tax issues and potential tax problems. The good news is that we have figured out tax fixes to deliver every possible tax benefit to you when you become a proprietary trader, including avoiding self-employment taxes, deducting your trading losses as ordinary with mark-to-market accounting, and deducting all your trading business expenses (which are not reimbursed by the firm). If you are a proprietary trader, you definitely need this consultation.
Our professional firm of CPAs and attorney is a leader in providing services to proprietary traders. Robert A. Green, CPA, wrote several articles on proprietary trading in Active Trader magazine (Oct. 2001, Dec. 2001 and March 2002). Click here.
GTT resources for proprietary traders.
Important tax matters for proprietary traders.
Take a close look at the firms' agreements.
If you have a question or just want to see how we can help you, please call us or e-mail us at info@greencompany.com.
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All consultations are done by phone and/or e-mail, directly with our
owner, Robert A. Green, CPA. Hour consultations may be split over
several sessions.
GTT Institutional: Incorporates our services for proprietary trading, money management and hedge fund services:
GTT CPAs and attorneys specialize in the special needs of proprietary traders, money managers and hedge funds. We have consolidated these separate, but related areas under our new practice area titled "GTT Institutional." These three practice areas have many things in common including but not limited to regulatory and compliance issues, complex tax matters, complex relationships with broker/dealers and institutional type trading. For more information about our related hedge fund and money management services, click here.
Many proprietary traders come to GTT for advice and services for
various reasons including but not limited to the below:
Join a proprietary trading firm: These
traders are considering to join a proprietary trading firm (broker/dealer)
as an LLC member (or otherwise) and they want GTT to advise them on
the prop trading firm LLC Operating Agreement and other terms and
conditions offered. They want GTT to tell them if its a good deal,
if it's ok for them to sign, and how their taxes will work going forward.
They pay GTT for consultation services (legal and tax) and they usually
sign up for GTT trader tax preparation
services. These traders figure GTT knows most of the prop trading
firms; as we have clients at most of the prop trading firms. We have
read most of their agreements, and we have written about the subject
many times at Active Trader.
Recruit other proprietary traders: These
traders are successful existing LLC members of a proprietary trading
firm (broker/dealer) and they have opportunities to recruit other
proprietary traders (the industry model) for additional methods of
compensation. The prop trading firm industry model is for successful
prop traders to recruit other prop traders into the firm and to act
as their mentor. In some cases, the prop trading firms take their
recruits directly into the firm, because the recruits have the necessary
brokerage licenses and the necessary capital to join. The mentor/recruiter
(our client) gets compensated commission overrides (and sometimes
a share of their trading gains) for the recruits. Our clients ask
GTT to work with the prop trading firm to handle regulatory, tax and
legal matters. In some cases, our client gets lower commissions themselves
or they receive commission overrides directly. We have the experience
you need for these situations.
Form and operate your own proprietary trading firm: Your proprietary trading firm (broker/dealer) will not accept your prop trader recruits if they lack the necessary broker licenses and sufficient capital required to join their proprietary trading firm LLC (broker/dealer). In cases like these, our proprietary trader client may want to form and operate their own "sub" proprietary trading firm. We form an LLC for them which opens a "customer account" with their proprietary trading firm (broker/dealer).
These prop trading firm entrepreneurs then either issue LLC memberships to their prop trader recruits, or they pay the prop traders as "independent contractors" (Form 1099-Misc. see "Important Tax Matters" below).
Some prop trading entrepreneurs also strike deals with "silent partners" who want to finance the recruited prop traders in exchange for a share of their commission overrides and a share of their trading gains. These deals can be done in many forms and vary greatly. We have several clever ideas to get this done.
GTT usually forms a GTT prototype proprietary trading firm "LLC" (Limited Liability Company) and we also consult you on and prepare the LLC Operating Agreement. First and foremost, we customize the agreement to protect your interests and we also make it very clear and fair for the prop trader recruits and money partners, if you have them. We factor in many complex issues including regulatory, legal, business, tax and accounting.
GTT creates one LLC member class for prop trader recruits, which reflects their sole profit and loss sharing allocations, solely looking to their "sub trading accounts"; they don't share in firm-wide income, only you do (and maybe your money partners). Profit sharing percentages vary (50% to 99%), but loss sharing is usually 100% to the prop trader recruit, with no risk to our prop trading entrepreneur clients. If you have "money partners", there are various types of arrangements that can be made. The money partner can be another LLC class member type with unique allocations, or the money partner can deal directly with the prop trader owner and not be a member of the LLC.
When it comes to sharing commissions, you must be a broker and you
must plan to have full disclosure and transparency. Otherwise, you
are asking for trouble. We have the answers you need, so come to us
with your questions.
GTT prepares your tax returns: We specialize
in preparing tax returns for all the proprietary traders mentioned
above. We know how to avoid self-employment tax on trading gains and
we can give you and your recruits all the tax guidance and support
you and they need. Visit our trader tax preparation
area to learn more.
GTT does your trade accounting with our GTT TradeLog software program:
If you have your own firm, or your own trading accounts outside of
the prop trading firm you belong to, GTT can do an excellent job for
you on your trade accounting. We have our own excellent trade accounting
software, GTT TradeLog. Barron's gave
it an excellent review.
If you have your own proprietary trading firm, we can do a separate trade accounting with our software for each of your prop trader recruits. We can help you set up a system to handle the profit sharing and draw payments.
Proprietary Trading Firm (Broker/Dealers) are growing as a place for business traders:
Lot's of hyperactive traders (the kind GTT specializes in) are moving to the prop trading firm environment and they have different needs and objectives for how they want to work with the prop trading firms. They will bring huge commissions to the prop trading firms and they like to grow by recruiting active traders and investors, to grow assets and commissions. They are brokers and they want to benefit from trading profits and commissions. This trends brings up many different deal scenarios and lots of challenges for tax, business, legal and regulatory issues. GTT is working with many of these clients now and we have the experience you need on legal, regulatory, business, tax and accounting matters.
GTT resources for proprietary trading firms:
Check out the July 2002 cover story on proprietary trading in Active Trader magazine. "Choosing sides: New traders are faced with numerous choices, but one of the first might be the most difficult. Deciding whether to trade through a proprietary firm or a retail brokerage is not easy — there are advantages and disadvantages to both and many issues to weigh. Read on to learn more about what to take into account before making a choice." The story was written by JEFF PONCZAK. To read the article, click here. Jeff refers to tax matters on proprietary trading written about by our Robert A. Green, CPA, in the Business of Trading section in Active Trader magazine. Click here for a list of those articles.
See List of Proprietary Trading Firms. Click here.
Testimonial from a trader who read this page and "saved himself" with this information. Click here.
Message boards where GTT has offered advice on proprietary trading.
Click here.
Important tax matters
for proprietary traders
Some proprietary traders are treated as either independent contractors
(who receive Form 1099-Misc), others are LLC members (who receive
Form K-1s) and still others are employees (who receive a W-2). Proprietary
traders need to understand their underlying agreements and utilize
tax-wise strategies that match their facts and circumstances. Not
all proprietary traders and firms are alike and different tax planning
and reporting strategies are warranted.
Independent contractors receive a Form 1099-Misc.
In most cases, these "independent contractor" proprietary traders work for a broker dealer entity and get paid by them to trade a sub-trading account. For tax purposes at year-end, the firm reports their "compensation" on a Form 1099-Misc (line 7, "non-employee compensation). The proprietary trader is generally required to report this income on their individual tax return Schedule C (Business Profit and Loss - line 1 "Gross Receipts"). The trader should deduct their trading business expenses not reimbursed by the firm on Schedule C, and the net income is then subject to self-employment taxes on Schedule SE. Per the IRS Web site, the total self-employment tax rate for 2001 is 15.3 percent of your net earnings from self–employment. The tax is made up of two parts. The maximum amount of net earnings subject to the social security part, 12.4 percent, is $80,400. All of your net earnings are subject to the Medicare part, 2.9 percent.
Tax idea: In some cases, the underlying agreement with the firm can be interpreted to show that the proprietary trader qualifies as a "Trader in Securities"; in fact they risk their own money. Traders in securities are exempt from self-employment taxes, so these traders will have a significant tax savings. If the trader has lost money against their "deposit" account, in some cases they can also deduct their losses on their tax returns.
If you are an independent contractor trader and you have placed a deposit with the firm, we suggest you contact our firm for help. We may find a way for you to be exempt from self-employment taxes and deduct trading losses. Contact us at info@greencompany.com, or call us at (212) 658-9502.
LLC members receive a Form K-1 (Partner's Share of Income, Credits, Deductions, etc.).
These traders usually become a Limited Liability Company (LLC) member in a a broker dealer entity by contributing $25,000 (more or less) to the firm's capital account. In most cases, the proprietary trader is assigned a "sub-trading" account based on their own capital paid into the firm and the trader keeps a high percentage of their trading gains. If the trader looses money, the firm usually charges those losses to the trader's capital account.
As above, the trader is really acting as a "trader in securities" for his or her own account, but within the LLC firm structure. The firm provides the trader with more leverage, through the broker dealer registration. The firm insists on strict trading controls to make sure the trader does not loose their firm money, as the firm is providing the leverage capital; which is at their risk.
In almost all cases, LLCs are taxed as partnerships and the firm
files an annual Form 1065 partnership tax return. The firm gives each
LLC member (a partner for tax purposes) a Form
K-1 at year-end. Technically, some LLCs can chose to be taxed
as C-corporations, but this is rarely the case, as it is not tax-beneficial.
Although the proprietary trader is an LLC member and "partner"
in the partnership tax return, in most cases, the proprietary trader
does not share in any of the other partners, or the firms overall
gains and losses. This is contrary to what happens in most partnerships,
where partners do share in firm wide gains and losses. Most proprietary
trading firm LLCs are structured so that the Class A members, made
up the owners, do share in firm overall firm wide gains and losses
(including but not limited to their share of the proprietary trader's
gains and commissions). The proprietary trader is usually a Class
C or D member and they only share in their "sub-trading account"
gains and losses (the trading gains that they generate). Sharing agreements
vary widely from firm to firm and among individual traders within
each firm. Different classes of LLC equity are designed for these
purposes.
The key point for tax purposes, is that the allocation of gains and losses must follow "substantial economic effect", which means that the K-1 tax reporting must "follow the money." It is odd that one LLC member may report a million dollar gain and another a loss, but the IRS should accept this tax reporting as proper because it does have "substantial economic effect."
LLC members are like "traders in securities" trading for their own account, except they are trading for a firm's account with more leverage. Traders for their own account have more tax flexibility and chances for tax savings strategies.
The proprietary trading firm does use mark-to-market accounting as a broker dealer, so the proprietary traders does have the benefits of MTM on their individual tax return.
The proprietary trading firm does "pass-through" the income to the proprietary trader as being exempt from self-employment taxes.
If you are a foreign trader LLC member of a US based proprietary trading firm LLC, you owe US taxes on your K-1 income. You won't owe state taxes. Click here to learn more on our "Non Resident Trader" page.
Here are some tax limitations and strategies for proprietary traders in LLC proprietary trading firms:
Almost all proprietary trading firms only allow individuals to join
as LLC members. This is primarily for SEC compliance reasons, as the
proprietary trader will be a registered individual member of the "broker
dealer" firm.
As indicated on our Entities for Traders
page, there are several key tax advantages for traders who set
up entities. Principally, the opportunity to set up and fund a tax
deductible retirement account and to deduct health insurance premiums.
Proprietary traders in LLC proprietary trading firms are not able
to participate in tax-deductible retirement plans or to deduct their
health insurance premiums. Some firms are trying to set up plans to
accommodate traders in this regard. Ask your firm about it.
Most LLC firms do not reimburse traders for their trading business
expenses outside of the firm, including but not limited to home office
expenses, meals, travel, supplies, internet services, and other trading
expenses. Some firms have instituted plans to reimburse traders, but
many traders don't know about it or don't take advantage of it.
For important information on self-employment taxes for members of LLCs and how some prop traders can avoid SE taxes, click here.
LLC members report their "partnership" ordinary gains and losses on Schedule E, page 2. If you submitted expenses to the firm for reimbursement, your Schedule E income will be lower. If you did not submit all your expenses or could not submit any, you should deduct your expenses as a second line item on Schedule E. Ask your accountant about this or contact our firm for help. This is very important, if you want to save a significant amount of taxes. Contact us at info@greencompany.com, or call us.
Employees receive a W-2:
These are the real jobs. Employees are rarely asked to put up any money so they are truly risking all the firms' money and none of their own money.
These jobs are rare and only the best firms offer them and they only offer them to proven traders with good performance records. These are not "come ons."
Unfortunately, they are good jobs but when it comes to taxes, employees get the least tax benefits versus the "independent contractor" using Schedule C and the LLC member using Schedule E.
Try to get the firm to reimburse you for your trading expenses outside the firm. Report your remaining "unreimbursed employee business expenses" on Form 2106. The problem is that Form 2106 expenses are "miscellaneous deductions" subject to a 2 percent AGI limitation and then further "itemized deduction" limitations.
Take a close look at the firms' agreements:
When you take a "job" or "position" with a proprietary trading firm (which allows you to trade the firm's capital), the first thing you should find out is whether or not you are required to risk any of your own money. The next thing to find out is how the firm will treat you for tax purposes, and if you will be entitled to trader tax benefits.
Proprietary trading firms (PTF) handle tax matters in a variety of
ways.
Some pay their proprietary traders a salary, which is reported on
a W-2
for "employees."
Others pay their traders as "independent contractors" and
report the "non-employee" compensation on Form
1099-Misc.
Finally, other proprietary trading firms are organized as Limited
Liability Companies (LLC) and issue their LLC member proprietary
traders a Form K-1 (Partner's Share of Income, Credits, Deductions,
etc).
PTF that offer true employment
Some PTF offer true employment – they hire you to trade their
firm's capital and you get paid a salary, which is reported on a W-2.
These PTF do not require you to risk any of your own money; they do
not request a "deposit" or "capital" (as many
other firms do).
The PTF maintain a sub-trading account for your trading activity, and your W-2 compensation is calculated as a percentage of your net trader profits (after the PTF charges you with various fees and expenses). Compensation percentages vary by firm, but 60 percent is probably average.
These firms offer what we consider to be legitimate "employer-employee" relationships.
The problem is that these PTF only hire experienced and successful traders. You can't blame them, as they are taking all the risk of losses. Some firms may not pay their traders bonus compensation until the trader makes "new high net profits” – i.e., they make back their trading losses.
Some PTF require you to deposit money for what they consider a "job."
However, when you look at the fine print, you realize it's not really
a job.
Some PTF "hire" traders only on the condition that the trader
"deposits" some of their own money into the PTF. This deposit
will be used to cover the trader’s losses and expenses, and some
firms require as little as $5,000.
When you read the fine print of these "employment agreements," you realize that the employee is 100 percent responsible for their own PTF sub-trading account losses, trading expenses and education. The employee is also entitled to receive (in the form of W-2 employee compensation) around 60 percent of their PTF sub-trading account net gains, after all trading expenses have been deducted.
The agreement provides that the PTF may charge all trading losses and expenses against the trader’s "deposit," and that the trader must add more money to keep the deposit amount at the original amount per the agreement ($5,000, for instance).
Many of these types of PTF agreements also require the proprietary trader to pass certain training sessions, which the PTF also charges the trader for in advance.
When you read the fine print of these agreements, you see that in
almost all cases – good, bad and ugly – the PTF ends up
keeping the trader’s deposit.
An example of a small, inexperienced trader
Joe Proprietary Trader wants to enter the trading business. Joe will
trade actively, and he will be classified as a Pattern Day Trader.
Joe does not have $25,000 to open a direct-access trading account,
and he sees an ad to join a PTF. He has an interview with the firm
and is convinced the firm is willing to train him and sponsor him
for his securities registration (series 7 or otherwise).
Joe thinks that the firm's request for a $5,000 deposit plus $1,000
more for training is reasonable; in any event, that is all he can
afford. He figures this is his only chance to enter the trading business,
and in a worst-case scenario he will lose $6,000 (or a little more)
and walk away with a Series 7 license. So far, Joe is correct.
We caution Joe to read the fine print. We have, and we notice that
the PTF has so many strings attached that Joe might end up with large
trading losses he is responsible for. If he doesn't pay, the firm
can sue him and also receive reimbursement for attorney’s fees.
Tax Problems: Joe may end up paying a significant amount of money
for the deposit, and he won't be able to deduct those losses as ordinary
losses on his tax return as someone with trader
tax status could. We can show Joe how to override the PTF tax
handling and get ordinary loss treatment for all his trading losses
and expenses. See the bottom of this page for how we can help.
On our Pattern Day Trader page, we pointed out that many smaller traders like Joe in the example above cannot open direct-access brokerage accounts because they don't have the necessary $25,000.
The bottom line: We believe that many
of these PTF deals are "come-ons," trying to sell you training
and other expenses. If you make money, all is OK, as both the firm
and you make money. If you lose money, you alone are responsible for
all losses. Plus, you subject yourself (in our opinion) to incredibly
tough conditions, including high leverage (it takes money to lose
money), pressure by the firm to close out your positions whenever
they want (profitable or not) and trading in proximity to other inexperienced
traders (not the pros you think they are). In reality, these "employment
agreements" may in fact be come-ons to sell you training. Remember
the old saying: "If it's too good to be true, it is usually false."
PTF Limited Liability Companies
Many PTF are organized as limited liability companies (LLCs).
Some of these firms previously hired traders and paid them with a Form 1099-Misc., but the SEC forced them to change their business model to become LLCs. The SEC also required that all proprietary trader members of these LLCs be registered with the SEC (Series 7 or other).
These PTF LLCs usually require LLC members to contribute a minimum of $25,000 to the LLC member capital. This $25,000 is probably related to the $25,000 required for the Pattern Day Trader rules.
When you read the fine print of the LLC Operating Agreement, you see similar provisions to those mentioned above on "deposit" accounts. The LLC member proprietary trader must maintain his or her capital account at $25,000. All the losses and expenses earned by the trader are charged against this capital account. All distributions (advances or compensation, whatever you want to call them) are also charged against the trader’s capital account.
The proprietary traders are usually a different type of LLC member from the "member-managers." Those are the real owners that manage the company and share in a portion of the LLC proprietary traders gains.
Tax Matters
LLC proprietary traders receive a Form K-1 with "special allocations,"
meaning they receive their exact net trading gain or loss after all
their expenses are charged. The K-1 does not reflect any company-
wide gains or losses, only the specific gains and losses of the trader.
Tax-wise, these allocations are correct because they have "substantial
economic effect"; meaning the taxable income and loss follows
the money.
Many of these LLC Operating Agreements do not allow the LLC member proprietary traders to submit their home-office or other trading expenses for reimbursement. If reimbursed, the LLC would charge the trader on the K-1. That would be fine, because that would reduce the trader’s net income for tax purposes. The problem is that many of these LLCs do not reimburse their proprietary traders and the proprietary traders do not know how they can deduct these expenses.
Need More Help?
If you have questions about proprietary trading, e-mail info@greencompany.com or call us.
If you need help evaluating a proprietary trading firm agreement and figuring out your tax matters with this firm, purchase one of the following offers:
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All consultations are done by phone and/or e-mail, directly with our owner, Robert A. Green, CPA. Hour consultations may be split over several sessions.
Our Robert A. Green, CPA is active at the www.EliteTrader.com boards. He is answering many questions on proprietary trading. Click here to see some questions and answers, excerpted below.
Excerpted below are questions on:
Trading remotely from Nevada with an LLC prop firm
What happens if a trader deposits $25,000 into an LLC and loses it all during the year
At EliteTrader.com, we got this question about Self-Employment Taxes
Question was: "Greentradertax, are traders receiving k-1's exempt from social security taxes?"
Answer: Our position is that prop traders are exempt from self-employment (SE) taxes on trading gains reported on their Form K-1s. Trading gains are sometimes reported as "ordinary income" since they are subject to mark-to-market accounting (MTM) and therefore are "ordinary."
In general, an LLC member (partner) is subject to SE taxes on partnership income. Only limited partners in certain circumstances can avoid SE taxes.
Class A LLC members of a broker dealer firm (the owners) make considerable income from commissions, so they are subject to SE taxes on their K-1 income.
Our position is that if a proprietary trader's only income from the LLC prop trading firm is their net share of trading gains from their "sub trading" account (after expenses and other charges are applied) and they don't share in any firm wide "earned income" activities, then that trader is exempt from SE taxes. We based this position on the overriding tax law that trading income is exempt from SE taxes.
Our position is also predicated on the tax theory that a partner's K-1 reports their "piece" of a partnership "pie" and in these cases, the partner's piece only has trading activity and no "earned income" activity.
Note of caution: This tax treatment is not specifically addressed in the tax code, and it is only our informed interpretation. Each trader's facts and circumstances may vary within a given firm or among firms. Before you decide not to pay SE taxes on your K-1 income from an LLC, you probably should consult with a proven trader tax professional. We can help, but so can other experts.
Here is the general tax law.
The general rules for LLC versus S-Corps are as follows. Employment taxes—LLC members pay self-employment tax on the net income of an LLC which is passed-through to its members. S corporations pay one-half of the employment tax for their shareholder-employees, and the shareholder-employees pay the other half, for wages paid by the S corporation to the shareholder-employees. However, the Code does not impose employment tax on the net income of an S corporation which is passed-through to shareholders (other than wages).
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RIA information:
“Net earnings from self-employment”
defined.
With modifications described below, the term “net earnings from
self-employment,” for purposes of the self-employment tax, means
the sum of these two amounts:
(1) The gross income of an individual derived from that individual's trade or business, less the deductions permitted by the Code that are attributable to that trade or business. 14 “Trade or business” for self-employment tax purposes has the same meaning as when used for federal income tax purposes in allowing trade or business expenditures under Code Sec. 162 . 15 For activities included or excluded from a trade or business for self-employment tax purposes,
(2) The individual's distributive share of income or loss (whether or not distributed) from partnerships in which the individual is a member.
Code Sec. 1402(a) ; Reg § 1.1402(a)-1(a)(2) .
In computing gross income and deductions under (1) and (2), above,
modifications are required to arrive at net earnings to which the
self-employed tax rate is applied. Income modifications consist of
(a) excluded income items, and (b) included income items,
Special modifications apply in determining net earnings from self-employment of:
... Partners (see below)
© Copyright 2002 RIA. All rights reserved.
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Self-employment income of partners.
For purposes of the self-employment tax, net earnings from self-employment include an individual's distributive share of income or loss from a trade or business (whether or not distributed) carried on by a partnership of which the individual is a member.
Code Sec. 1402(a) .
A partner includes in self-employment earnings his or her share of
the partnership income or loss, as separately stated on the partnership
return, which arises from the trade or business of the partnership.
Thus, in computing self-employment earnings, a general partner could
take into account current passive losses from his partnership's farming
activity.
Self-employment income is reported to the partner on the Schedule K-1 (Form 1065) the partner gets from the partnership. If income from some source unrelated to the business is included in the share, it should be eliminated.
RIA observation: The application of the self-employment tax to the income of partners results in the partners being subject to self-employment tax on income generated by their services as well as income generated by the partnership capital. Where partners cannot avoid the self-employment tax under the limited partner exception (see below), it may make sense to segregate the capital intensive business from the service business. For instance, a group of doctors who conduct a radiology practice as a partnership may place the ownership of the x-ray equipment in a separate S corporation that would charge the partnership for the use of the equipment. Thus, while the income from the doctors' services would be subject to self-employment tax, the income generated by the use of the equipment wouldn't be subject to self-employment tax.
A partner picks up the distributive share of the partnership business earnings regardless of the partner's lack of active participation in the business. 26 But for an exception applicable to limited partners,
When the partner's year is different from the partnership's, the partner picks up the distributive share of the partnership earnings for the tax year of the partnership which ends with or within the partner's own tax year.
© Copyright 2002 RIA. All rights reserved.
====================
Self-employment income of limited partners.
In computing net earnings from self-employment, the distributive share of an item of income or loss of a limited partner is excluded. But this exclusion doesn't apply to guaranteed payments ( ¶ 576,055 ) to that partner for services actually rendered to or on behalf of the partnership, to the extent the payments are shown to be remuneration for those services. 34 Thus, these payments would be included: salary and professional fees received for services actually performed by the limited partner for the partnership. If a person is both a limited partner and a general partner in the same partnership, the distributive share received as a general partner is covered under social security.
Under proposed regs, a partner's net earnings from self–employment would not include his distributive share of income or loss as a limited partner (defined at ¶ 576,058 ). However, guaranteed payments made to the partner for services actually rendered to or on behalf of the partnership engaged in a trade or business would be included in the partner's net earnings from self–employment. 35.1 The proposed regs would apply for the first tax year beginning on or after the date the proposed regs are published as final in the Federal Register.
RIA recommendation: Taxpayers who want to exempt their partnership's distributive share from the self-employment tax must be ready to prove to IRS (if challenged) that they: (a) are “limited partners,” and (b) have complied with the “limited partnership” statute where their partnership was established. A taxpayer's limited involvement in the operations of a partnership won't make the taxpayer a “limited partner” for self-employment tax purposes absent proof of the above two requirements.
© Copyright 2002 RIA. All rights reserved.
07-25-02 08:50 AM
Trading remotely from Nevada with an LLC prop firm
Question:
I'm thinking of relocating to Nevada which is exempt from state income
taxes.I plan on trading remote(at home)with a pro firm that issues
K-1's to their traders.
Answer:
If you live and work in Nevada, a tax free state, and trade "remotely"
with an LLC prop trading firm outside of Nevada (for example in
a high taxing state), then you should not have to pay taxes in that
high taxing state. The LLC firm accountants may or may not issue
you a state K-1 and instructions on how you may be able to avoid
taxes in their home state.
When people invest in hedge funds (investment partnerships) in a high tax state and they live in non-taxing state, they may receive a K-1 for the high taxing state, but the cover letter from the accountants state that since it's an investment partnership, the investor does not have "source income" in the high tax state in which they don't reside and therefore they don't have to file a tax return in that high tax state.
Trading is not an investment partnership, as the trader is active.
The key here for not owing taxes in the high taxing state is that
you claim you don't have "source income" in that high taxing
state because you live and trade from another state and your income
in the LLC is solely your share of your own trading account. See my
prior post about how your K-1 income is derived.
07-25-02 08:56 AM
What happens if a trader deposits $25,000 into an LLC and loses it
all during the year
Question:
What happens if a trader deposits $25,000 into an LLC and loses it
all during the year and quits the firm. Are there deductions that
he can take and how would he go about doing that. Thanks for any help.
Answer:
Different LLC proprietary trading firms may handle this differently
based on their LLC Operating Agreements.
In general, you have deposited $25,000 into an LLC firm for your "capital" account. If you lose your capital account in trading, then you have a trading loss for that capital account amount; $25,000 in this case. The LLC firm is a broker dealer using mark-to-market (MTM) accounting, so your loss is a MTM trading loss and reportable by you on Schedule E as an ordinary loss.
Summary, you get a full ordinary loss for your entire capital account paid, lost and closed out.
If you don't exit the LLC firm and therefore close your capital account to zero, the LLC firm may not apply your loss to your capital account on your K-1. The firm may apply your loss to other Class member capital accounts until you replenish your capital account and or your sub-trading account profits. This also varies greatly from firm to firm. What this means is that some firms don't report losses on K-1s to their prop trader LLC Class 'x' members. Ask the firm and look closely at your agreement.
Testimonial from a trader who read this page and "saved himself" with this information.
-----Original Message-----
From: Exxx@aol.com
Sent: Friday, August 16, 2002 2:39 AM
To: info@greencompany.com
Subject: Re: Joe on your website
I just wanted to say thanks for the example of Joe. You just saved
me from making a huge mistake and I really appreciate that. Let me
explain. A proprietary firm just made me an offer to work for them.
They wanted $5k down and another $500 for the training. I accepted
their offer partly because I would be getting a series 55 license
and because of the prospect of making big money. Until I read your
article, I didn't know that I would be responsible for the loses and
that I would be sued by the firm if I didn't pay. I also didn't realize
that I was required to maintain the $5k deposit. I am a divorcee with
a child and could not survive financially if I created trading loses
and got sued. You saved me from losing my shirt and I am forever grateful.
Sincerely,
Mxxx Pyyyy
