A sole proprietorship is a business that's owned and operated by one person. According to Iowa's Secretary of State, it's also the simplest and most common form of business in the United States. If you are a frequent trader of stocks, then you may be considered a sole proprietorship by the Internal Revenue Service, and may be allowed to deduct a significant portion of your stock trading expenses on Form 1040's Schedule C, like other sole proprietorships. However, be prepared to carefully document your activity, otherwise the IRS may consider you an investor instead of a sole proprietor.
1. Make a lot of trades for short-term gain. This is more complicated than it sounds, and has been the subject of litigation. According to SmartMoney.com, a sole proprietor trader makes trades as a full time job and has established a "regular and continuous pattern" of making several trades every day that the market is open. Smart Money estimates that spending over 20 hours per week making over 1,000 trades per is adequate, but more is better. Thirty hours a week and over 5,000 trades a year should be more than enough to qualify you as a sole proprietor, but even the IRS admits that the standard isn't set in stone, according to Smart Money.
2. Segregate your long-term holding from your short-term holdings. Keep your accounts clearly marked. Trading retirement accounts don't count; you must be trading to make a profit every day, and must be willing to pay taxes on those gains.
3. Keep careful records of your business expenses. If you're paying fees every time you trade, that's deductible. Investment newsletters, conferences and periodicals? Deductible. Home office expenses? Deductible. However, be advised that home office expenses often send a big red flag to the IRS. As a result, consult a tax advisor on what is and isn't legitimately deductible.
4. Include your deductions on Schedule C of Form 1040 and pay your taxes. This is where sole proprietors tell the IRS what deductible business expenses they incurred during the year, and what will separate you as a sole proprietor from the active investor.
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