Traders flat out hate tax time. Successful traders, somehow I am lumped in this group, have a few obstacles to face during the year. One, the wash rule, and two, quarterly taxes. If you play around with either of these, the tax man will cometh.

Option trading is NOT reported to the government by your broker. It is completely up to you to report your gains to Uncle Sam. Options are a pain in the rear to compile at the end of the year unless you have a tax program. I use GainsKeeper. It does all the calculations for you and takes into account the wash rule. I do this each quarter and pay accordingly. There are huge penalties for screwing these up I can assure you. During an audit they will simply look at your trading accounts, your bank accounts and do a “lifestyle” audit. You’ll get a penalty, a new tax bill, and 15% interest for the back taxes. Keep in mind they usually run 2 or 3 years behind.

Another challenging tax law is the ability to only write off $3,000 of your losses on a given year. If you lost money trading you get 3K to write off. The challenging part of the law is that you get one more year to apply those losses to gains. Last year I lost 30K trading after making 125K the year before. I had 27K left to apply to any trading gains I made this year. One one hand I’m shellshocked for losing so much, but the other side says we get 27K tax free if we can make some money trading. I actually made 30K this year with a few trades so it worked out perfectly. The key was trying to take advantage without chasing.

The last thing I highly recommend is keeping every single receipt for things you purchased to enable you to trade. Same goes for your blog. If you make money in either you need to write off your costs. My new laptop and desktop computers. My Investors Business Daily and WSJ. My cell phone, my ISP. I didn’t reach ,but if I needed it to trade or do my websites I wrote it off. I simply got a folder and every time I purchased something I threw it in the file. It saved me. I sold two sites, this one and Wallstrip. I also took in 8K in advertising. By the time it was all said in done my little side hobby netted me mid $XX,XXX. A little tax planning helped out.
I was able to write down 8K of purchases against this. That little envelope paid off.

The last thing that saved me was Turbo Tax. It asks questions my tax guy forgets to ask. They see hundreds of people and simply base questions on the paperwork you turn in and your receipts. Sure, a good tax guy asks the right question but they’re still human. A computer just asks them all. I simply walk through (OK my wife does) and fill in the blanks. The last two years it has done a much better job than my tax guy did. It even gives you a ranking of your chances of an audit. I highly recommend it. They key being you have the receipts and the info it needs. The result was my first ever tax return. I actually am getting 6K back. I paid quarteries based on what I was making. By the time I added in my write offs I actually got money back. My wife and pretaxed everything, even started a funded health insurance plan, and it resulted in 46K in pretax saving. All because of good tax planning. Not cheating, planning. And now I get to get my $1500 tax refund to boot. For all of you cynics that say this is a typical elite avoiding taxes, I respond with 1. I still paid a huge tax bill and 2. I only follow the law, I don’t make it.