Taxation of Investors Versus Traders & Dealers

Many individuals (and businesses) buy stock and securities with the hopes and intent of the securities appreciating and perhaps paying interest or dividends.  What determines when an individual is treated as an investor, dealer or trader?  Furthermore, what is the tax treatment and proper way to report income and expenses when one is classified as an investor, dealer or trader?  The article below has been prepared by a tax attorney to provide information related to the above issues and questions.  Please remember to always discuss your specific facts and circumstances with your tax attorney and tax advisors, as this article is for informational purposes only.

The Internal Revenue Service applies different definitions and meanings to the terms investors, dealers and traders.  Thus, we will begin with an explanation as to these terms.  An investor would typically buy and sell securities in anticipation of the securities appreciating, as well as producing other returns such as interest or dividends.  In short, the investor would buy a security and hold the security for personal investment as opposed to conducting these activities in a trade or business.  Generally, the investor would hold the securities for themselves and for a substantial period of time.  When an investor sells or disposes of the securities, the transactions are reported as capital gain or capital loss on the investors 1040 via a Schedule D.  As an investor, capital loss limitations under IRC Section 1211(b) would apply as well as wash sale rules under IRC 1091.  Investors may be able to deduct expenses associated with creating the taxable income on their Schedule A itemized deductions.  Further, interest paid for money to buy investment property that generated taxable income may be deducted.  The cost of commissions and other related fees to dispose of the stock are not deductible but should be accounted for in calculating the gain or loss from the sale or disposition of the securities.

A dealer will differ from an investor in that a dealer will purchase and hold securities for their customers and conduct these activities in the ordinary course of the dealer’s business.  The dealer may hold an inventory of securities.  The dealer will make their money and income by marketing securities to their clients.  A dealer will report gains and losses from the disposition of securities by applying and using market-to-market rules.

Apart from being designated as an investor or dealer, special rules can apply when you are determined to be a trader in securities.  In short, a trader would be considered to be in the business of buying and selling securities for your own account.  Under certain circumstances you could be considered to be a business even if you do not hold an inventory and maintain customers.  The IRS could consider you to be in business as a trader in securities if you meet the following conditions:

 

  • The activity is substantial;
  • You are attempting to profit from daily market movements if the pricing of securities and not so much from appreciation, interest or dividends; and,
  • The activity is practiced with continuity and regularity.

If you are a trader in securities you can report your income and expenses on a Schedule C with your 1040 and thus Schedule A limitations would not apply, and further, the gains and losses from selling securities are not subject to self-employment tax.

The article above has been prepared by John McGuire of The McGuire Law FirmJohn is a tax attorney and business attorney with the firm and can be reached at John@jmtaxlaw.com

 

Is a Lawsuit Settlement Taxable?

Is the money I receive in a lawsuit settlement taxable?  If you have received money via a lawsuit settlement, you may be asking yourself this exact question.  Perhaps you were injured in a car accident, or filed suit against a prior employer for wrongful termination and are now receiving a monetary settlement.  The settlement may or may not be taxable depending upon all of the facts and circumstances surrounding your case.  The article below has been prepared by a tax attorney to provide additional information relating to whether or not proceeds from a lawsuit settlement need to be included in gross income on your individual income tax return.  Please remember, this article is for informational purposes only, and should consult your tax attorney or tax advisor regarding your specific facts and circumstances.

If your lawsuit settlement was the result of personal injuries and/or personal sickness you do not need to include the settlement amount, or that portion in your gross income as long as you did not take an itemized deduction of the medical expenses.  If you did previously take an itemized deduction of the medical expenses in prior years (this would likely be taken on a Schedule A) you must include the portion that was deducted and provided a benefit in prior years in your income.

Ok, so what about settlement awards and amounts for emotional distress and/or mental anguish?  If the award or settlement was for emotional distress or mental anguish that originated from personal injury or personal sickness, the proceeds from the settlement would not be taxable and thus not need to be included in your gross income.  However, if you receive a settlement amount for emotional distress or mental anguish that did not originate from personal injury or personal sickness, that portion or amount of the settlement is taxable, and thus would be included in your gross income.  If a portion of your settlement is taxable as emotional distress or mental anguish, the amount can be reduced by the amount that you paid for other medical expenses that are attributed to the emotional distress or mental anguish and that have not been previously deducted and medical expenses you previously deducted for the emotional distress and mental anguish that did not provide an actual tax benefit

What about non-personal injury type settlements?  What about a settlement for lost wages or lost profits?  If you receive money via a settlement for last wages, not only is the amount taxable and included in gross income, but the settlement amount is also subject to self-employment tax.  For example, if you sued a prior employer for discrimination or involuntary termination and requested lost wages, and won a settlement, the portion received for lost wages should be included in income and subject to self-employment tax.  If you filed a suit against a third party for lost profits and received a settlement for lost profits, the proceeds would be taxable, and would included in your business income.  It may depend upon the business structure, plaintiffs in the suit and other related issues as to the further taxation of those settlement proceeds for lost business profits.

What about settlement proceeds for lost property?  Typically, if the proceeds received for lost property do not exceed your adjusted basis in the property, then the proceeds would not be taxable, but rather would reduce your basis in the property.   However, if the amount received was in excess of your adjusted basis, the amount in excess is income.

What if you are paid interest on the settlement amount?  Generally, the interest would be taxable, and would included like normal interest from a savings account.

The above article has been prepared by John McGuire of the McGuire Law Firm.  John is a tax attorney and business attorney in Denver, Colorado.  Please feel free to contact John directly with any questions, comments and concerns.

Can the IRS Take my Passport?

Can the Internal Revenue Service really impact my ability to travel?  If you owe taxes to the Internal Revenue Service, especially “seriously delinquent tax debts” the answer is yes, the IRS can impact your travel plans by impacting your passport as discussed below.

In January of 2018, the Internal Revenue Service announced it will implement new procedures that could impact an individuals ability to obtain or maintain a passport.  The IRS stated these new procedures will impact those individuals that have “seriously delinquent tax debts.”  Under the Fixing America’s Surface Transportation (FAST) Act, the IRS is required to notify the State Department of certain taxpayers owing seriously delinquent tax debts.  The FAST Act also requires the denial of passport applications, renewals of passports and in some cases even the revocation of an individual’s passport.

So what constitutes a seriously delinquent tax debt?  Generally, the IRS has defined a seriously delinquent tax debt as someone who has a tax debt to the IRS of more than $51,000.  The $51,000 threshold would include tax, penalty and interest for periods whereby the IRS has filed a Notice of Federal Tax Lien or issued a levy, and the taxpayer can no longer properly challenge the lien or levy action.

If you are taxpayer with a seriously delinquent debt to the IRS, you can likely avoid the IRS contacting the State Department by taking the following action(s).

 

  • Pay the debt in full;
  • Paying a settlement amount through a tax settlement or offer in compromise with the IRS;
  • Paying the tax debt under a formal installment agreement with the IRS;
  • Paying the tax debt through a formal settlement with the Department of Justice;
  • Suspending collection action by the IRS through an innocent spouse claim; or
  • Requesting a Collection Due Process Hearing with a levy.

 

A taxpayer under the following situations should not be at risk for having their passport rights impacted.

 

  • The taxpayer has filed and is in bankruptcy;
  • Is an identity theft victim;
  • The taxpayer’s account has been determined non-collectible by the IRS;
  • The taxpayer is located in a federally declared disaster area;
  • The taxpayer has a pending installment agreement with the IRS;
  • The taxpayer has a pending offer in compromise with the IRS; or,
  • The taxpayer has an adjustment that with satisfy the IRS debt in full.

 

In short, to prevent any passport issues if you owe taxes to the IRS, if the tax debt is being addressed, your likelihood of having  a passport application denied or a passport revoked is severely lessened.

The above article has been prepared by John McGuire of The McGuire Law Firm.  John is a tax attorney and business attorney and can be reached through www.jmtaxlaw.com

Please remember this article is for informational purposes only and you should consult directly with your tax attorney regarding any tax matters or questions.

Tax Attorney

Denver Tax Attorney

What is an Abusive or Illegal Tax Scheme

What is an abusive tax scheme?  You may have heard of a program or scheme that promises to eliminate or substantially lessen your tax burden and taxes due to the Internal Revenue Service.  A promoter of such a scheme is likely to use financial instruments such as a trust and/or pass through entities such as a limited liability company or limited partnership.  When these programs and schemes are used improperly and to facilitate tax evasion, IRS may criminally investigate the scheme and prosecute the promoters as well as investors.  You should remember that if something sounds too good to be true, it could be, and could lead investigation by the Internal Revenue Service and potential criminal tax charges.  It is recommended that you discuss any potential tax scheme or program with a tax attorney.  The article below will provide more information regarding abusive tax schemes, but this article is for informational purposes only, and please always discuss your specific issues with a tax attorney.

Overtime tax schemes have developed from relatively simple single structure arrangements into more complex and sophisticated overall schemes and strategies that take advantage of foreign jurisdictions and financial secrecy laws.  The Internal Revenue Service Criminal Investigation has a national program to fight these illegal tax schemes and programs and prosecute violators with criminal tax charges.  Our government has and will continue to criminally prosecute the promoters of illegal tax schemes and those who play substantial roles in aiding or assisting the tax scheme, which could include investors into the tax scheme.  The biggest question when initially looking at these issues is, what constitutes an abusive or illegal tax scheme and could lead to criminal tax evasion and criminal tax charges?  In short, an abusive tax scheme that could lead to criminal matters would violate the Internal Revenue Code and related federal statutes.  Furthermore, generally the violations of the federal tax law and related statutes would use domestic or foreign trusts as well as pass through entities such as partnerships as vehicles in violating the federal tax laws.  In recent years, foreign bank accounts and other financial accounts have been used more frequently to accomplish tax evasion because of reporting issues (one may refer to FATCA for further information).  Many foreign banks and financial institutions do not report income such as interest and dividends, and thus there is no record of the income to the trust, entity and individuals.  With no reporting to the federal government, and no reporting on applicable tax returns, the income goes unreported.

As stated above, foreign accounts or trusts may be used frequently in illegal tax schemes.  A common scheme that may have many variations may flow as follows.  A United States citizen has a business in the United States and also forms a foreign corporation and foreign bank account in the same name of their US business.  When checks are received, the checks are processed through the foreign business and foreign bank account.  The foreign account will likely be in a foreign jurisdiction that does not report income and related items to the US government.  Thus, the income goes unreported on the taxpayer’s tax return and there are no 1099s issued to the US government to have any knowledge of the account and thus income going into the account.  Some schemes will involve a foreign business that issues invoices to a United States business.  The invoices are paid to the foreign business and a deduction taken by the US business, but the income of the foreign business is not claimed.  The business are commonly owned and the US citizens involved are not claiming the income of the foreign business.  Again, we have unreported income into a foreign account, and likely interest and/or dividends in a foreign account that would not be reported.  The above examples could go many more layers deep, but provide good examples as to how an illegal tax shelter or abusive tax scheme could be established.

The above article has been prepared by John McGuire of the McGuire Law Firm for informational purposes, and should not be relied on as legal advice.  Mr. McGuire is a tax attorney, representing individuals and businesses before the Internal Revenue Service and can be contacted directly through the McGuire Law Firm.

Forms Filed With the Streamlined Offshore Voluntary Disclosure Program

For many individuals, the Streamlined Offshore Voluntary Disclosure Program provided welcome relief in comparison to the “initial” Offshore Voluntary Disclosure Program.  Many taxpayers with foreign accounts and assets contact wonder what forms and documents must be filed to apply for the Streamlined Offshore Voluntary Disclosure Program.  In general, taxpayer’s must file the necessary FBARs, amend the necessary 1040s (1040X) and Form 14654.  Further, based upon the facts and circumstances, other forms may not be prepared and filed.  You should always discuss your requirements with your tax attorney and/or other tax advisors.  The video below has been prepared to provide additional information regarding the forms filed with the streamlined program.  You can contact The McGuire Law Firm to discuss your issues directly with a tax attorney.

Amending an Offer in Compromise

When an offer in compromise is submitted to the IRS, the IRS may agree that the taxpayer is an offer candidate, but not agree with the original offer in compromise amount.  Thus, can the initial offer in compromise be amended?  Yes, the offer can be amended to reflect a different amount and terms.

This issue is discussed in the video below by John McGuire, a tax attorney at The McGuire Law Firm.

You can contact The McGuire Law Firm to speak with a tax attorney.

Non-Willful Conduct Under Streamlined Offshore Voluntary Disclosure Program

Non-willful conduct is required under the Streamlined Offshore Voluntary Disclosure Program (Streamlined OVDP).  If the failure to report foreign bank accounts and/or foreign financial assets was non-willful, you may be subject to a lower penalty base.  The key question is, what constitutes non-willful actions by a taxpayer?  Generally, the IRS would consider non-willful to mean the conduct or failure to properly report was due to a mistake, negligence or based upon a good faith misunderstanding of the law.  Perhaps an understandable lack of knowledge may lead to non-willful conduct.

The video below also provides a short explanation of non-willful conduct, which of course is based upon the facts and circumstances of each case.  Please remember to consult with your tax attorney directly if you have questions relating to FATCA, FBAR filings and/or other foreign tax compliance issues.

You can contact The McGuire Law Firm to speak with a tax attorney regarding your issues.

Your Right To Notice and a Hearing Before the IRS

As taxpayer you have the right to notice and a hearing prior to the IRS enforcing collection of any tax due.  After the IRS has issued a series a notices, the IRS must issue a Final Notice of Intent to Levy and allow you 30 days to request a hearing, which is generally referred to as a Collection Due Process Hearing.  During this hearing you can provide information and a proposal to prevent enforcement action such as an installment agreement or an offer in compromise.  This is the due process afforded to you and can be very beneficial in resolving an issues with the Internal Revenue Service.  The video below has been prepared by a tax attorney to provide additional information regarding your right to a hearing.

If you have any questions or are experiencing problems with the IRS, you can speak with a tax attorney by contacting The McGuire Law Firm.  The McGuire Law Firm has offices in Denver, Golden, Broomfield and DTC where you can meet with a tax attorney.

Depreciation and Impact on Basis

When an asset is placed into service and depreciation is taken as a deduction, the adjusted basis of the asset will be impacted.  The video below has been prepared by a tax attorney at The McGuire Law Firm to discuss this issue.  Please remember to always consult your tax attorney, business attorney, CPA and/or other advisers regarding your specific facts and circumstances.

John McGuire is a tax attorney and business attorney at The McGuire Law Firm.  You can contact John at 720-833-7705 or via the website at: https://jmtaxlaw.com/contact-us/

 

Common Capital Contributions to a Partnership

When forming a partnership the partners will make initial capital contributions and may make additional contributions depending upon the operations of the partnership and partnership agreement.  Common capital contributions may include cash, property (vehicles, equipment, computers etc.) and sometimes services.

The video below has been prepared by a tax attorney and business attorney at The McGuire Law Firm to discuss capital contributions.

John R. McGuire is tax attorney and business attorney at The McGuire Law Firm.  The McGuire Law Firm represents and advises clients on tax matters from IRS debts and tax audits or overall tax planning and the tax implications of certain transactions.  Further, the firm represents small and medium sized business with their contract issues as well as the formation and sale of businesses or business interests.  In addition to his law degree, John holds an advanced degree in taxation known as an LL.M.  The McGuire LAw Firm provides a free consultation with a tax attorney.