Module 13: Mastering Taxes & Legal Considerations for Traders Flashcards
Question: Why is understanding taxes important for traders?
Answer: Understanding taxes helps traders minimize tax liabilities, comply with legal requirements, and maximize after-tax profits.
Question: What is the difference between short-term and long-term capital gains?
Answer:
Short-term capital gains: Profits from assets held for less than a year, taxed at ordinary income rates.
Long-term capital gains: Profits from assets held for more than a year, taxed at lower rates.
Question: How are stock trades taxed in the U.S.?
Answer: Stock trades are subject to capital gains tax, with short-term gains taxed as ordinary income and long-term gains taxed at lower rates.
Question: What is the wash-sale rule?
Answer: The wash-sale rule prevents traders from claiming a tax deduction on a loss if they repurchase the same or substantially identical asset within 30 days.
Question: How are options trades taxed?
Answer: Options trades are generally taxed as capital gains, but complex options strategies may have different tax treatments.
Question: What is mark-to-market (MTM) tax accounting for traders?
Answer: MTM accounting allows traders to treat gains and losses as ordinary income, avoiding capital gains tax and allowing losses to offset other income.
Question: What qualifies a trader for trader tax status (TTS)?
Answer: A trader must trade frequently and actively, demonstrate a consistent pattern, and meet IRS guidelines to qualify for trader tax status.
Question: How are cryptocurrency trades taxed?
Answer: Cryptocurrency gains are subject to capital gains tax, and crypto-to-crypto trades are considered taxable events in many jurisdictions.
Question: What is tax-loss harvesting?
Answer: Tax-loss harvesting is selling losing investments to offset taxable gains and reduce overall tax liability.
Question: How do traders report earnings to the IRS?
Answer: Traders report earnings on Form 8949 and Schedule D, and professional traders may file under a business entity.
Question: Are commissions and trading fees tax-deductible?
Answer: Yes, trading fees and commissions can be deducted as expenses to reduce taxable income.
Question: How do international traders handle U.S. taxes?
Answer: International traders may be subject to U.S. tax treaties, withholding tax, and special reporting requirements if trading in U.S. markets.
Question: What is the Section 1256 tax treatment for futures and forex traders?
Answer: Section 1256 contracts are taxed at a blended 60/40 rate (60% long-term and 40% short-term capital gains).
Question: Why is it important to consult a tax professional for trading?
Answer: Trading taxes are complex, and professional advice helps traders comply with laws, maximize deductions, and avoid penalties.
