Reporting
Tax Reporting and Compliance
Contrary to popular belief, even among tax professionals, simply setting up an entity in which to trade does NOT make that entity a “trading” entity and therefore bypass the trader in security requirements. Otherwise, why wouldn’t every investor do it?
This is a similar argument to having a vehicle painted with a logo, telephone number and other advertising and expect the vehicle to be completely deductible. Well, why wouldn’t it be? Because the vehicle owner still has to substantiate his business usage.
Thus, the trader in securities still has to meet the requirements of a trader and the entity’s investment activities must rise to that same level as well.
The investor versus trader issues have been discussed at length and I would refer you to those.
We are now going to show you various reporting scenarios assuming you have an entity setup in which you are investing or trading.
Examples will be provided for an individual trading in a single-member LLC and secondly, in a flow-through entity, an S-Corporation (Form 1120S), assuming that both meet the trader in securities requirements and have made a mark-to-market election.
As suggested in the Entities discussion, stick with flow-through entities unless there is some major overriding consideration to setup a C-Corporation or trust, such as liability protection or family issues.
Tax Return Presentation
With the above example data and trade notes in mind, take a look at the tax return presentation for each of the two trading entities - one as a Single Member LLC and one as an S Corporation. As you will see, there is no difference in the tax liability (Form 1040, p 2, line 63).
Taxpayer trades in a Single Member LLC and files Schedule C
Taxpayer trades in an S Corporation
These examples are from 2019 and do not reflect the QBID, which began in 2020.