Just see the world with the holy heart

Taxation of Commodity Traders

Commodity Traders may be taxed under two different methodologies. One I refer to as the "Default Rule" and the other I refer to as the "Mark-To-Market Election Rule".

Under Internal Revenue Code ("IRC") section 1256, Commodity Traders are granted two major tax breaks:
Tax Break #1
60% of commodity gains are taxed at the long-term gains tax rate and 40% of gains are taxed are treated as short-term gains. This is known as the "60/40 Rule".
Tax Break #2
Commodity trading losses may be carried back three years, to offset prior years commodity trading gains.

In order to meet the definition of a Commodity Trader, for purposes of the above favorable tax breaks, an individual must be a member of a domestic board of trade designated as a contract market by the Commodity Futures Trading Commission (a.k.a. "regulated exchange"). The definition of a commodity under IRC section 1256 includes any regulated futures contract, any foreign currency contract, any non-equity option, any dealer equity option and any dealer securities futures contract. If you trade on a regulated exchange you are a "Commodities Trader" under IRC section 1256 and can avail yourself of the preferential 60/40 Rule.

When such Commodity Traders file their tax returns for the year they report their commodities gains and losses on Form 6781, which is attached to Form 1040 (Federal Income Tax Return for individuals). The gains and losses reported on Form 6781 are split into two groups: 60% long-term gains and 40% short-term gains. The next step is to move these two groups of gains/(losses) over to Schedule D and they are taxed accordingly (long-term gains/losses are netted against short-term gains/losses). If there is a net long-term gain this is taxed at the current favorable capital gains tax rate of 15%.

What I just described is the general rule of taxation of Commodity Traders and most Commodity Traders are taxed under this rule. Any expenses you may have incurred (such as margin interest expense) may only be deducted as an itemized deduction and, thus limited.

There is another tax option available to Commodity Traders, however. If a Commodity Trader meets the definite of a "Professional Trader" they are eligible to make the IRC section 475 Mark-To-Market election. This new optional rule came into effect in 1997 under The Taxpayer Relief Act of 1997, which gave Commodity Traders the ability to make the Internal Revenue Code ("IRC") section 475 Mark-To-Market election. When you make this election it allows Commodity Traders to do two things:

#1 Treat commodity gains and losses as ordinary income (loss). When you make the IRC section 475 Mark-To-Market election you are eligible to file a Schedule C and list your commodity business expenses. Under this election, commodity business expenses have more value as they are no longer considered itemized deductions but, instead, ordinary business expenses. These expenses can then be used to offset other income you reported, such as wages. When you make the Mark-To-Market election, a Commodity Trader is electing out of the 60/40 Rule and, instead, treats all gains and losses as ordinary. The 60/40 Rule is the default rule that is available to Commodity Traders who have not made the IRC section 475 Mark-To-Market election. Most Commodity Traders do not make the IRC section 475 Mark-To-Market election in order to preserve the favorable taxation of commodities (60% long-term gain treatment and 40% short-term gain treatment).

#2 Allow Commodity Traders to take deductions on Schedule C for business expenses associated with your commodity trading business. You can only take deductions on a Schedule C where you have a valid IRC section 475 Mark-To-Market election in place.

In order to be eligible for the IRC section 475 Mark-To-Market election a Commodity Trader must meet the stringent tax definition of a Trader. The "Trader" definition, for purposes of the Mark-To-Market election, requires an individual to seek to profit from short-term changes in the market. This trading activity must be substantial, frequent and continuous. You must be a full-time trader who is trying to capitalize on the momentary swings in the market each day. If you meet the definition of a "Trader" then you are eligible to make the Mark-To Market election, which must be made by April 15th of the current year if you want the election to be effective for the current year. Example: You make the election by April 15, 2012 for tax year 2012. Once in place the election allows you to treat all gains and losses as ordinary (reported on Form 4797, which is attached to your individual income tax return Form 1040).

Commodity Traders cannot take advantage of the 60/40 Rule and take deductions on Schedule C at the same time. It's one or the other. The 60/40 Rule is only available to Commodity Traders who DID NOT make the IRC section 475 Mark-To-Market election. The ability to take Schedule C deductions is only available to Commodity Traders DID make the IRC section 475 Mark-To-Market election.

Tom is a Certified Public Accountant, a Certified Financial Planner, CLTC (Certified Long-Term Care) and President of Cerefice & Company, the largest CPA firm in Rahway, New Jersey. Tom works with clients helping them manage their money, retirement planning, college savings, life insurance needs, IRAs and qualified plan rollovers with an eye towards maximizing tax benefits and minimizing taxes. Tom is founder of the Rich Habits Institute and author of "Rich Habits".

Article Source: http://EzineArticles.com/?expert=Thomas_Corley
Article Source: http://EzineArticles.com/6752843

No comments:

Post a Comment

Hello (^-^)v

Search Here

Custom Search


accounting airline airplane airways alchemy alien android animal artist automotive baby beatle beauty betelguese blackjack business cancer car car insurance cartoon casino castle caterpillar celebrity cellophane celluloid century change cheap chess child china christmas city claim clinton coffee come from comment computer console cook cookies coral cosplay county credit cards cricket culture dating dead definition design diet disaster divers dofollow domain drive drug dwarf ear earthquake easy education effect egyptian elephants exchange link family fancy-free farming fashion fat finance fingerprint first installed first killed first plastic fish fitness flare flight flower follow your comment food footloose forex free gadget gambling games geology ghost gold goldfish golf Google gossip goverment great wall grow gypsies hair harvard hawaii head header health Healthy Life hear heavy metal herbal herbs himalaya historic sites historical history history of naruto hocus pocus hollywood hollywood sign home honeybee hormon hotels in hollywood how how long human body idea insect Inspire insurance introduced invented invest island japan japannesse jet jewelry job junk ken uston kids kitten knowledge konoha ninjas law Lawyer learn lego liberty bell lion loan logo love lyrics magician magnetic mail mammoth many market meal medical memoriam metal gallium metallica mining miracle mistery money mortgage mosquito mountain move murderer music Music Artist myth naruto history nature navigation neuron star new year news nike nobel prize not a sloution notification obama old olympic online online business orchid ornament other paid to click painite. gem painting party patent pendet dance people pet piranha pizza planet plant poem poker prediction presentation queen railway rare reborn recycle religion retouch river rockwalk romantic salmon scotch sea seat seating sell SEO Space sport star strange moment street study success people sunrise swoosh symbol tape tari pendet tax tea keep technology term tickets tips toothpick tour de france tourism tourist toy travel traveling children trend tsunami tusk twins usa uzumaki naruto vacation vegetable venus video visit Indonesia war water west what are wild wine wolly woman word work wright ಬ್ಲೂ ಚಿಪ್

Popular Posts

Copyright © Vision in memorial. All rights reserved. Template by CB