What Forms are Included in a Trader's Tax Return

Trading Income is Business Income – Tax Forms Should Reflect That

Feb 4, 2010
David A. Todd

Report Trading Income-Loss on Schedule C - IRS website

Securities traders who do their own income taxes must make sure all needed forms and statements are included in their return. Business income should be properly reported.

Many people have professionals prepare their US income tax returns. This applies to securities traders as well, since the trader’s tax return will be much more complicated than a personal return. However, traders who normally do their own tax return need not fear the extra forms and statements needed for their securities trading business. Understanding what goes into the business return, and care and attention to record keeping and math will serve the trader well.

Recordkeeping Suggestions to Help Traders With Taxes

Someone who qualifies for trader tax status is working their trading as a business. As with any small business, recordkeeping and accounting are necessary. For the securities trader, the key documents needed for preparing the tax return are:

Records of income, which are normally shown on the monthly broker’s statement, but which may have to be supplemented by a more concise record of trades.
Records of expenses. Some of these come from broker’s statements, such as purchase and sales commissions, SEC fees, margin interest, and any type of account fees. Others will have to be generated and maintained by the trader, such as: office supplies; office equipment such as computers, desks, tables, paper and toner; home office deduction records, etc.

Keeping these records through the year will speed preparation of the tax return.

Trader’s Business Forms Depend on Type of Business Arrangement

A securities trader may chose to run their business as any of the three basic types of businesses:

Sole proprietorship
Partnership
Corporation

In each case, the IRS has rules, forms, schedules, and instructions on how to complete the taxes. If the trader did not actively set up a corporation or partnership, the business by default operated as a sole proprietorship. Business income in this case is reported on Schedule C of Form 1040. In cases where a husband and wife work together trading, a domestic partnership is often used. In this case, business income is reported on Form 1065, U.S. Return of Partnership.

Formation of a corporation is less frequently used by traders, due to the potential complexity that corporate accounting and rules require. The composition of a corporate return for reporting income is beyond the scope of this article.

In the case of Form 1065 (partnership), the forms and statements typically included in the tax return are as follows.

Form 1065, U.S. Return of Partnership Income
A statement of expenses, which should be summed and carried forward to Form 1065, line 20.
Schedule K-1 for Form 1065, Partner’s Share of Income, Deductions, Credits, etc. One should be prepared for each partner, so for a husband and wife partnership this would be two such forms.
Form 4562, Depreciation and Amortization. This will account for depreciation on any office equipment or furniture that is not expensed in one year. This will be carried forward to Form 1065, line 16.
Form 4797, Sales of Business Property, on which the sum of trading income/loss (not including any expenses other than commissions and SEC fees) is reported on line 10.
A record of each trade showing: Name of security (symbol is not sufficient) date of purchase, date of sale, no. of units traded, net proceeds, cost basis, and profit/loss. This can be on the trader’s own spreadsheet, so long as the columns agree with how Schedule D of Form 1040 is arranged. These trades should be summed, and the profit or loss carried on to Form 4794, line 10.
A statement of other trading related income, such as: capital gains distribution from certain types of securities (if any); dividends received; interest on brokerage account; an miscellaneous income (refunds, etc.). These should be summed and carried forward to Form 4797, line 10.
Form 8829, Expenses for Business Use of Your Home. Note that some traders do not use this form. Instead they add all home office expenses into the statement of expenses. In either case, the home office expenses are carried forward to Form 1065, line 20.
A statement as to the date the business was formed, and what type of accounting is used (cash or mark-to-market).

In the case of Schedule C, all of the above are needed, with the exception that Schedule C is used instead of Form 1065, and the partnership statements are not required. The lines on Schedule C will be different than on Form 1065, but these are easily figured out.

How Many Details Should the Trader Provide to the IRS?

Some traders believe that it is not necessary to report each trade on the tax return. Instead, they sum all the cost basis of their trades and report it as “Sum of business property bought,” and sum the proceeds of their trades and report it as “Sum of business property sold.” This is done in the belief that each securities trade is the equivalent of inventory purchased by a store, or raw materials purchased by a manufacturer. These businesses do not have to report every transaction; why should the trader have to?

The trader’s tax return is somewhat complicated. Yet the trader does not have to fear the extra forms, so long as he already has a good grasp on preparing the individual tax return. Each trader should assess whether the best thing to do is have a professional prepare their return. Also, the advice given in this article should always be verified by checking IRS forms, instructions, and publications.

Source: Various IRS forms, instructions, and publications.