As we navigate a world with COVID-19, large swings in the stock market have become the norm. Many buy and hold-style investors are more actively managing their portfolios to take advantage of these swings. The IRS has a special trader status for taxpayers who frequently engage in trading. This status includes a special accounting method, not available to the average investor, that can come with substantial tax savings. The status allows an investor to make special deductions and opens the door to a wide range of tax reduction strategies unavailable to the casual investor. However, with potential savings also come risks that could end up costing the taxpayer/trader more than the average investor. Weighing the pros and cons of this status is crucial in minimizing tax liability. The big question for tax planning is this — does obtaining trader tax status result in less tax?
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Intentionally Filing a Defective Tax Return
Creativity on a tax return is a natural tendency. Many strategies and behaviors we know are wrong, e.g. not reporting all income. However, is it ever okay to disregard some deductions and pay more tax? At first glance, it would seem that the IRS should like the idea of more reported income and a higher tax liability attached to the additional income. The IRS does not.