Praise for Previous Editions
“Here’s my advice: first, design a trading strategy that gives you an edge in the markets; second, trade your strategy with precision and steadfastness’ third, study The Trade’s Tax Solution and apply Tesser’s principles to your taxes and financial planning. If you’re trader or investor who wants to keep the maximum possible amount of the money you’re earned, your copy of The Trader’s Tax Solution will be worth its weight in stock certificates?” - Thomas A. Bierovic Manager, Strategy Testing & Development, Omega Research, Inc.
“I have heeded Ted Tesser’s advice for many years. His background, knowledge, and experience have been invaluable in saving me an enormous amount of money over the years. This book is my bible for financial and tax strategies.” - Bill M. Williams, PhD, CTA Professional trader and President, The Profitunity Trading Group
“Taxes can be the largest single expense for a successful trader. Ted Tesser draws on his experience as both a CPA and successful trader to show you how to minimize this expense. This book is clearly written, practical, and comprehensive. Deserves a place on every trader’s bookshelf.” - Sheldon Knight, K-Data, Inc.
“Ted Tesser is one of the nation’s foremost experts on investment taxation. In this definite guide to reducing and even eliminating whole classes of tax exposure, Ted presents a wealth of solid tax strategies that investors and traders will find indispensable.” - Nelson Freeburg, Editor, Formula Research
“Ordinarily a ho-hum subject, Tesser has made reading about taxes for traders enjoyable. This book is not only a fun read, it is an invaluable reference. The Trader’s Tax Solution contains everything a trader needs to know about taxes.” - Sunny J. Harris, President, Sunny Harris & Associates, Inc. Author, Trading 101: How to Trade Like a Pro, Trading 102: Getting Down to Business, and Electronic Day Trading 101
Ted Tesser, CPA, is a partner with Tesser, Horowitz, and Ullmann, Inc., a firm serving clients around the world. He specializes in investment taxation, is an active trader, and is the author of Trader's Tax Survival Guide and the best-selling video Cut your Trading Taxes in Half!
Acknowledgments xiii
Introduction: We Are All Traders! 1
1 The Basics of Accumulating Wealth and Keeping It 3
The Foundation--Things You Need to Know 3
The Basics of Tax Planning 3
Red, Gray, or Black-and-White? Choose Your Tax Strategy 4
There Is No Mystery to Saving Taxes 7
The Paradigm Shift to Tax Freedom 8
2 The Trader ’s Tax Solution 9
There’s Too Much Tax . . . Here’s What You Can Do about It 9
“Thanks a Million, Uncle Sam.” (Or Should I Say $89,500.49 after Taxes!) 11
Does Anyone Feel Morally Obligated to Pay the Maximum Income Tax? 12
How to Direct the Government in Your Best Interests 13
Investors Are Hit Particularly Hard 16
The Government’s Free Lunch--Your Tax Return! 17
Starving the Government--Trader Status 17
Investor, Trader, or Broker-Dealer/Market Maker--What’s the Difference? 18
You May Be a Trader and Not Know It! 20
Case in Point--Was Louis Yaeger a Trader? 22
What This All Means 25
Schedule C--Born to Be Filed 26
Other Benefits of Claiming Trader Status 28
It’s Your Business--Why Not Deduct It? 29
3 Recent Trader Cases 47
The Case of Fredrick R. Mayer 47
The Case of Rudolph Steffler 53
The Case of Stephen A. Paoli 54
Trader Status--Other Cases 56
4 The 1997 Trader ’s Tax Act--The Most Significant Changes for the Trader and the Investor since 1986 58
The Top 10 List of Things to Know 58
Section 475 for Traders of Their Own Accounts 64
Summary and Conclusion 68
5 The Triple Crown 69
The Most Effective Tax-Saving Strategy I Have Ever Known 69
Step 1--The Business 69
Step 2--The Entity 75
Step 3--The Voluntary Employee Benefit Association 97
The Triple Crown 111
6 Providing for a Wealthy Retirement 112
The Big Boom of 50-Year-Olds! 112
Life’s Tough and Then You Retire--How to Make It Easy 114
Denial Is Not a River in Egypt 115
See No Evil, Hear No Evil . . . Opening Your Eyes 115
And the Walls Come Tumbling Down--the Pillars of Retirement Planning 118
The Tax Factor 119
Paying My Fair Share Does Not Mean the Maximum Tax I Can Pay 120
What Lies Ahead--and How Will It Affect Your Retirement? 121
The Crumbling Pillars 121
Conclusion: The 10 Deadly Sins of Retirement Planning 127
7 They Don’t Make Hearses with Luggage Racks 129
The Last Laugh 129
Estate-Tax Planning 101: The Basics 131
The Unified Gift and Estate Tax 131
Multiple Choices--A Career in Government or a Career in Government? 136
A Typical Estate 136
Your Retirement Plan Gets Hit Worse 137
Conclusion 142
8 Income and Expenses: A Review 144
Income Defined 144
Earned and Passive Income versus Investment Income 148
Unlimited Gains/Limited Losses 149
Unlimited Income/Limited Expenses: The Pig and His Pal 150
What Is an Expense? The “Four Criteria Deduction Test” 150
Total Return Investment Plan (TRIP) 151
Calculation of True Yield 152
The Risk/Reward Ratio Revisited 156
Risk/Reward Ratio Meets the “Tax Factor” 158
9 New World Retirement Planning 162
Individual Retirement Accounts 162
Simplified Employee Pension Plans 164
Qualified Retirement Plans (KEOGHs) 165
10 New World Estate Planning 170
Using the Annual Gift-Tax Exemption 171
Using Estate-Tax Planning Strategies 173
Other Considerations in Addressing Estate-Tax Planning 174
Sixteen Crucial Definitions 179
11 The Double Play: To Give Is But to Receive! 183
Background 183
To Further Compound the Situation 189
A CRT and Your Heirs 190
A Crummey Trust Is Not So Crummy! 191
To Gift Is But to Receive 192
Prepay Your Estate Tax for Pennies on the Dollar 193
The Double Play--Summary 196
12 The Layup: It ’s Just a Matter of Trust 197
How and Why to Set Up a Trust 197
The Layup--Summary 201
13 The Home Run: A Way to Double Your Exemptions 202
The Basics 202
The Home Run--Summary 203
14 Modern-Day Miracles--Chalk Up a Few for the Good Guys 204
Trader Status Audit Victories I Have Had 204
What We Can Learn from All of This 218
15 Knowing Your Limits: How Far Can You Go? 220
Question of Legality 220
“Only the Little People Pay Taxes” 221
How the IRS Builds a Criminal Case 222
The Taxpayer Bill of Rights 224
Specific Mitigating Circumstances 226
Your New Rights as a Taxpayer 229
Significance to the Investor and the Trader 230
Michael Milken 233
How to Play for Keeps with the IRS 233
What Criteria Are Most Important in the Selection of Tax Returns for Audit? 234
Types of Audit-Selection Processes 236
Ten Ways to Reduce Your Chances of Being Audited 237
Playing in the Major Leagues with the IRS 242
Audit DO’s and DON’Ts 243
Other Winning Audit Techniques 246
16 101 Tax-Reduction Strategies 250
Conclusion 280
Appendix A Investment /Trading Vehicles and How to Report--Tax Consequences 281
Appendix B Deductions Related to Investment and Trading Activities 291
Appendix C The VEBA--Code Sections 294
Appendix D The VEBA--Court Cases 300
Appendix E Other VEBA Rulings 312
Appendix F 166 Frequently Asked Questions and Answers 318
Appendix G Trader Tax Return Examples and the 475 Election 350
Appendix H Logs and Journals 468
Appendix I It ’s All a Matter of Time (The Reality of the Wash Sale Rule) 511
Appendix J Trader Evaluation Questionnaire 515
Notes 519
Disclaimer 523
About the Author 525
Index 527
Additional Resources 541
