#1 Expense of Successful Traders

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The number one expense of successful traders. What do you think it is? What do you think is the number one expense? It's taxes. Taxes are the number one expense. So let's talk about taxes.

First of all, let's talk about how taxes relate to traders, at least this is in a general sense. In the United States, when we look at the tax code, we have ordinary income tax rates and we have capital gains tax rates. Ordinary income tax rates, here's the schedule, they range between 10% and 37%. of income. It's a blended rate, so as you go up, your rate goes up. But it's a blended rate of all these tears, but at the top level, your tax rate is 37% and that's above $539,901. Now, the reason this is important is that when we trade, trading income is considered to be capital gains and then based off of the type of trading you do, how long of a timeframe you trade, and what products you trade, you get different tax rates. A lot of people love to trade stocks, but they actually don't take into consideration the tax implications. If you trade stocks, or if you trade cash foreign exchange, cash FX, you are paying the highest rate and that is because all of your trading is considered to be short term capital gains and short term capital gains are taxed at ordinary income. So if you make a lot of money trading stocks, so you make a lot of money trading cash FX, you're going to pay a lot in taxes, 37% above 539,000. So most stock trading falls into short term capital gains, and cash foreign exchange falls into short term capital gains. The other issue here is that if you lose money, your maximum allowable loss is $3,000. So you pay 37% if you do really well and if you lose, you can't even take it as a deduction, you can only take it up to 3000. That can be a real problem, especially if people are starting out. You go out and lose $100,000 trading in year one, you're only going to be able to deduct $3,000 in losses, and then the $97,000 will carry forward.

Then we have long term capital gains rate. So we had short term capital gains and then we have long term capital gains. The long term capital gains tax rate is much more favorable. It's also graduated, but it's zero, up to 44,000. It's 15%, between $44,625 and $492,300 and over $492,300, it's 20%, which is still much, much lower than 37%. To qualify for long term capital gains, however, you have to hold your trade for over a year. So in stocks, you have to hold the trade for a minimum of a year to be able to get long term capital gains. Now, people who trade futures and futures options, they get to qualify under a special section of the code and that section is 1256. It's called the mixed straddle. So in Section 1256, when you trade futures, or you trade futures options, you get taxed at 60/40 blended rate, which means that 60% of your income is taxed at the long term capital gains rate, and 40% of it is taxed at the short term capital gains. Now when we were looking at trading equities, trading stocks, and we looked at short term capital gains and long term capital gains, you realize the tax when you sell. So short term, you're buying and selling it's not very long, long term, we as we said you have to hold it longer than a year. Well, we trade futures however, we move to a new type, which is called mark to market. That means that every day and specifically at the end of the year, all of your positions are marked to the settlement and then you pay taxes on what that number is. It has nothing to do later when you sell it every day it's mark to market and at the end of the year, you'll pay a tax rate based off the year end settlement regardless of whether you have the position or not. So regardless whether you still have the position, it's a better way of saying. 

A lot of people love trading futures because they're at a much better tax rate than stocks and or cash FX. If you trade cash FX, just consider you can trade foreign exchange futures and get a much lower tax rate. So if you trade Euro dollar cross, Euro dollar cross is taxed at a much higher rate, potentially, then Euro futures, remember that. Section 1256 also has a maximum of $3,000 in losses that can be deducted at any given year, but one of the advantages is that the max tax rate is basically 26.8% of this blended rate instead of 37%, which is great. Then you can also qualify what's called trader status. Trader status is when the IRS recognizes you as an actual professional trader. When you have trader status, it allows you to deduct your expenses, your trading related expenses, to reduce your net taxable income. When you have trader status, your trades are marked to market just like for futures, for tax purposes, but it also waives the $3,000 max loss deduction. So if you lose $100,000, to track with trader status, you get to determine to deduct the  entire $100,000. To achieve trader status, you have to pass certain thresholds, you have to trade a certain amount, a certain volume in your account, you have to have a minimum amount of trading capital in your account at all times.  The tax rate for trader status will vary based off what you trade. So as you've seen, taxes are much higher in equities, and cash FX than they are in futures. Even if you have trader status, that's going to be the case. 

One of the things I want you to think about is that being able to reduce your taxes is going to reduce your number one expense and setting up a great trading tax plan can be one of the best investments you ever make. If you think you're going to make a lot of money trading, or if you are making a lot of money trading, you need to take care of this. One thing I want you to understand is that your optimum tax rate will never come from a single strategy, it will come from a blend of strategies. One of the things that we teach our traders is they want to get the maximum amount of money into their retirement accounts and you can contribute a lot more than you think you can. We have lots of techniques. For example, you can set up a solo 401 K and you can contribute up to $130,000 to a solo 401 K and if you're over 50 and you're married and your spouse is over 50, you can contribute $147,000 a year. It's a big number and you can still do your Roth IRAs as well. We want to make sure we're maxing our contributions into our retirement accounts so we get all that money in there and trade it tax free. 

One of the things that we teach our students also is we show them and we have a company that helps us do this, that basically allows us to trade in our retirement accounts with full control of the money. This means that you can trade cash FX, this means that you can trade crypto, this means that you can short stocks, this means that you can trade on margin. This means that you can trade options, anything pretty much that you would do as a trader, you can do in the structure using your retirement money. It's incredibly powerful. So we want to start there and once we have that in place, then we have other strategies that we can show you that can get your max tax rate down to 10.5%, 10.5%, not 37%, not 26.8%, 10.5%. So we do this through structures and LLCs and using international tax structures. They also act as a fantastic asset protection vehicle. setting these up will really make it difficult for creditors to get to you. 

Let's just look at a quick example here. This is a very simplistic example and this is just for education purposes only. But we got three traders, we’ve got trader Adam, we got trader Bob, we got trader Chuck. All three of them are doing pretty well trading, they all have trading income of $500,000. Trader Adam is trading stocks, he's being taxed at ordinary income, and so on $500,000 He owes $148,752. This is an effective tax rate of 29.75%. Trader Bob trades futures and he's taxed at the 60/40 section 1256 income. His taxes are $134,885, he saves $13,867 in taxes by having 60/40 treatment. Then we have trader Chuck. Trader Chuck is actually trading in one of the structures that I alluded to where his max rate is 10.5%. So he makes $500,000, but he only pays $52,500 in taxes, a tax rate of 10.5% and his savings of $96,252. Compared to Trader Adam, that's a massive amount of money in a single year. You know how you see all those graphs, if you invest $2,000 a year or $5,000 a year and you do it over time, you know, you're worth millions, you know, 30 years later. Think about the power of this, if you could save this kind of money in taxes, what would that add up to? 

When you go through and you look at the best traders ever and they make these ungodly amounts of money, one of the things you need to understand is every one of them is playing a massive tax game that's allowing their money to compound. Remember that. If this is something that you're interested in and you want to figure out how you could save massive amounts of money on your taxes, you can click on this link below and there's information here. You can check it out on your own. I just wanted to stir a thought in you, want to stimulate a thought about how you could be more tax efficient? This is worth a lot of money. Remember, when you save money in taxes, it's like guaranteed money. When you make money trading, you have to take risk and you could lose money to make that money. But when you save money in taxes, that's risk free money. You just save it, you get more of what you earn. That's important. So stay tuned to every Tuesday, just like this week, will now come with additional webinars in which I'll teach you different ways to take your performance to an elite level. I'll see you next week.