Tax Trader Status and self employment tax

[mickey]

Hello

One of my clients is a day trader.  This year, in 2020 no less, he made $200K.  He will file schedule C sole proprietor.  He thinks that he doesn't have to pay self employment tax because he qualifies for the Trader Tax Status (TTS).  I did some reading online and am not finding his claim to be true.

Does anyone have any knowledge of this TTS?

Thank you

[BobKamman · Accepted solution]

Gains and losses from selling securities from being a trader aren't subject to self-employment tax.

https://www.irs.gov/taxtopics/tc429

Has he asked yet if he's eligible for an IRA or 401(k)?  Because he'll need some retirement savings, with no Social Security credits earned.  

[mickey]

Thank you so much for this.

He did ask for the retirement.  I think he's qualified for SEP IRA or solo K based on this self-employment income then?

[mickey]

How would you report this so the program doesn't calculate SE tax?  I use Proseries but I'm sure it's the same way for other software. 

[itonewbie]

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@mickey wrote:

...One of my clients is a day trader.  This year, in 2020 no less, he made $200K.  He will file schedule C sole proprietor.  He thinks that he doesn't have to pay self employment tax because he qualifies for the Trader Tax Status (TTS).  I did some reading online and am not finding his claim to be true.

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Agree with Bob.  The facts and circumstances tests outlined in the link Bob provided are from case laws.  His investment intent, nature of the income derived, as well as the frequency, extent, and regularity of his trading, when considered collectively, are more important than the $200k he made.

Not sure if Sch C treatment is his only objective.  If deducting his expenses is all that he's looking for, that may just be it but MTM is often what traders aim for.

[itonewbie]

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@mickey wrote:

How would you report this so the program doesn't calculate SE tax?  I use Proseries but I'm sure it's the same way for other software. 

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You still report the transactions on Sch D.  Sch C would just be for expenses.  Hence, my point about MTM.

[Terry53029]

@mickey @itonewbie  If your client has made a Mark-To-Market election, and is a qualified day trader he reports expenses on schedule C, does not pay se tax, but he reports gains and losses on 4797 sales of business property. He must have filed form 3115 and received approval from IRS, and I believe he can't do this the first year. You should do some research and not depend on comments on a forum as if you do it wrong there could be substantial penalties. 

[itonewbie]

@Terry53029  The reporting is as discussed above.  And yes, the election must generally be made by the original due date of the return for the prior tax year.