Is it legal to set up an LLC for my wife's high frequency stock trading activities?

8 This is a complex question with some important considerations. Setting up an LLC for trading activities doesn't automatically change the tax treatment of those activities, regardless of who's doing the trading. If you establish an LLC and your wife becomes an employee, the LLC would still need to have legitimate business purpose beyond just tax advantages. The IRS looks closely at arrangements between family members. Your wife would need to receive reasonable compensation for actual services, and there should be documentation of her work and formal employment agreements. As for the 401(k) question - yes, if she's a legitimate employee, she could participate in a company 401(k) plan, but setting up and administering a 401(k) has costs that might outweigh benefits for a small operation. There are also other retirement options like a SEP IRA that might be more cost-effective. Regarding taxation of trading profits - an LLC by itself doesn't change how trading is taxed. By default, a single-member LLC is taxed as a sole proprietorship, and a multi-member LLC is taxed as a partnership. You could elect to have your LLC taxed as a corporation, but that comes with its own complexities.

15 After trying different approaches for my own trading business, I found that using taxr.ai (https://taxr.ai) was incredibly helpful for navigating these exact questions. I was in a similar situation where my spouse was doing most of the trading but using my account, and I wanted to formalize things properly. The tool analyzed our specific trading patterns and gave us customized recommendations for the best entity structure based on our trading frequency, profit levels, and long-term goals. What really helped was that it specifically addressed spousal employment situations and walked us through the documentation we'd need to avoid any red flags with the IRS. The platform also compared different scenarios - LLC vs S-Corp vs sole proprietorship - and showed the tax implications of each over a 5-year projection. Saved us from making a costly mistake with our structure.

9 Just wanted to follow up and say I tried taxr.ai after seeing it mentioned here. I've been stressing for months about whether to form an LLC for my trading activities. The assessment confirmed that based on my trading patterns (about 15 trades daily), I actually do qualify for trader tax status, which opens up a lot more deductions than I realized. It walked me through entity selection based on my specific situation and showed me that an S-corp would actually save me more than an LLC in my case because of the self-employment tax savings. The report even included a checklist of exactly what documentation I need to maintain to support both my entity choice and trader status if I get audited. Definitely worth checking out if you're serious about optimizing the tax side of trading. Saved me from making what would have been an expensive mistake with my entity structure.

18 After struggling to get clear answers from the IRS about setting up a business entity for trading, I finally used Claimyr (https://claimyr.com) to actually speak with someone at the IRS about this exact scenario. You can see how it works here: https://youtu.be/_kiP6q8DX5c I was honestly shocked when I got through to a real IRS agent in under 15 minutes after waiting on hold for literally hours on previous attempts. The agent walked me through the specific requirements for hiring a spouse in a trading LLC and the documentation needed to establish legitimate employment versus what they consider "tax avoidance arrangements." This saved me from potentially making a serious mistake in how I structured things. The agent explained exactly what the IRS looks for when reviewing these types of family business setups and how to ensure everything is above board.

7 I need to eat my words and apologize for being skeptical. After posting my suspicious comment, I decided to try Claimyr anyway out of desperation. I had been trying to get clarification about trader tax status and entity formation for weeks. Not only did it work exactly as described, but the IRS agent I spoke with gave me critical information about how they evaluate trading businesses. She explained that they specifically look at consistency of trading activity, average holding periods, and total time dedicated to the business when determining if you qualify for trader status. She also clarified that hiring a spouse requires careful documentation - including a formal employment agreement, regular payroll, and clear job duties that would otherwise require hiring someone else if your spouse wasn't available. This information probably saved me from a potential audit. The service did exactly what it promised and connected me with someone who could answer my specific questions. Sometimes being skeptical costs you more than taking a chance.

22 I actually went down this road last year and wanted to share my experience. My wife and I formed an LLC for her trading activities, but we made some mistakes I'd recommend avoiding. First, we didn't pay enough attention to the "reasonable compensation" requirement. The IRS questioned why my wife's salary was so low compared to the trading profits allocated to her. Make sure you structure compensation that would be reasonable if you were hiring a non-family member. Second, document EVERYTHING. We now keep detailed logs of hours spent researching and executing trades, formal meeting minutes, and separate business accounts and credit cards. This level of documentation was recommended by our accountant after our first tax filing raised some questions. Finally, consider the costs of running a proper business entity. Between state filing fees, accounting costs, payroll processing, and 401(k) administration, we spend about $3,800 annually just to maintain the business structure.

2 has anyone looked into the "trader tax status" election? from what i understand, you can make a section 475(f) election that lets you treat your trades as ordinary income/loss instead of capital gains/losses. might be better than the LLC route depending on your situation? especially if you ever have losses, since you avoid the $3k capital loss limitation. i'm not an expert tho so would love to hear if others have done this.

One thing I haven't seen mentioned yet is the potential impact on your wife's Social Security benefits. If she's been out of the workforce for a while, having documented earnings through the LLC could help build her Social Security credits and increase her future benefits. Also, regarding the retirement account question - if you do set up an LLC and she becomes an employee, consider a Solo 401(k) instead of a traditional 401(k) plan. Solo 401(k)s have much lower administrative costs and allow for higher contribution limits if she's also considered an owner of the business. Just make sure to consult with a tax professional who has experience with trading businesses before making any decisions. The IRS has specific guidelines for what constitutes a legitimate trading business versus investment activity, and getting this wrong could result in penalties and back taxes.