Should I start a formal business or remain self-employed for trading income?

This is a great question that many successful traders eventually face. The answer really depends on a few factors specific to your situation. If you're consistently making that level of income from trading, you should definitely consider setting up a business entity. As a self-employed individual, you're paying self-employment tax on all your profits (that's 15.3% for Social Security and Medicare). With an S-Corp, you can pay yourself a reasonable salary and take the rest as distributions, which aren't subject to self-employment tax. For traders, an S-Corp is often the most advantageous structure. It gives you the pass-through taxation benefits (avoiding double taxation of C-Corps) while still providing liability protection and the ability to reduce self-employment taxes. An LLC taxed as an S-Corp can accomplish the same thing. The C-Corp typically doesn't make sense unless you have plans to seek significant outside investment or have complex ownership structures in mind.

I actually went through this exact same situation last year when my trading took off! After months of research and talking to different accountants, I finally found a solution that saved me thousands in taxes. I used this service called taxr.ai (https://taxr.ai) that specializes in tax strategies for traders and investors. They analyzed my trading patterns and income and gave me a detailed breakdown of the tax implications for each business structure. They showed me that in my case, an S-Corp would save me around $22,000 annually compared to remaining self-employed. They even handled all the paperwork for setting it up. The best part was they connected me with a CPA who specializes in trader tax status and knew exactly how to structure everything properly. Totally worth checking out if you're dealing with that level of trading income.

Just wanted to update everyone - I went ahead and tried taxr.ai after reading about it here. Honestly, I was blown away by how thorough their analysis was. They showed me that with my specific trading pattern (mostly day trades with some swing positions), an LLC taxed as an S-Corp was my best option. The tax savings projection they provided showed I could save about $27,500 in self-employment taxes this year alone. They also highlighted some deductions I hadn't even considered as a trader - like a portion of my home office, specialized trading software, and even some educational resources. What really impressed me was how they explained the Mark-to-Market election and how it could benefit my specific situation. Definitely recommend them if you're making serious money from trading.

For anyone making six or seven figures from trading, getting proper tax advice is crucial. I wasted HOURS trying to get through to the IRS with questions about trader tax status last year. After sitting on hold for literally 3+ hours multiple times only to get disconnected, I was about to give up. Then I found Claimyr (https://claimyr.com) and watched their demo (https://youtu.be/_kiP6q8DX5c). They actually got me connected to an IRS agent within 15 minutes when I'd been failing for weeks on my own. The agent clarified that I needed to file Form 8949 differently as a trader versus an investor, which saved me from making a costly mistake. If you're setting up a business entity for trading, you'll definitely have tax questions that need IRS clarification. Using Claimyr saved me days of frustration and potentially an audit.

Okay I need to publicly eat my words here. After calling BS on Claimyr in my previous comment, I decided to try it myself because I was desperate to talk to someone at the IRS about my trading business classification. I'd been trying for TWO MONTHS to get through. Used Claimyr yesterday and got connected to an IRS agent in 27 minutes. The agent confirmed I qualified for trader tax status based on my trading frequency (300+ trades per year, almost daily activity) and helped me understand exactly how to document everything properly. What I learned directly from the IRS agent was that my S-Corp setup for trading needed specific documentation to avoid issues during an audit. They explained exactly what to file and how to classify certain expenses. Honestly can't believe how much clearer everything is now. Sometimes you need to hear it directly from the source.

One thing nobody's mentioned yet is the cost/benefit analysis of different entities for traders. I'm a tax preparer (not giving professional advice here), but here's some general info: - Self-employed (Schedule C): Simplest, but you pay self-employment tax on all profits - LLC (single-member): Taxed same as self-employed by default, but can elect S-Corp taxation - S-Corp: Can save on SE taxes but has administrative costs (~$2-3k/year for compliance) - C-Corp: Rarely makes sense for traders due to double taxation Also, traders should look into the Mark-to-Market election (IRS Section 475), which lets you deduct all losses as ordinary instead of being subject to the $3,000 capital loss limitation. But you need to make this election by April 15 of the tax year it applies to.

Has anyone actually successfully achieved "trader tax status" with the IRS? I keep hearing mixed things about whether day trading qualifies as a "business" or just as investment activity.

Great discussion here! I'm dealing with a similar situation and want to add a few considerations that might help others: One thing to really think about is the timing of setting up your business structure. If you're planning to elect Mark-to-Market status (Section 475), you need to make that election by April 15th of the year it takes effect, and it's generally easier to do this when you first establish your trading business rather than switching later. Also, don't forget about state taxes in your decision. Some states have different rules for S-Corps vs LLCs, and if you're doing well with trading, state tax implications could be significant depending on where you live. From my research, the "reasonable salary" requirement for S-Corps is probably the trickiest part. The IRS doesn't publish specific guidelines for traders, so you really need documentation showing what comparable professionals earn. I've seen suggestions ranging from 40-60% of net trading income as salary, but definitely get professional advice on this. One last thing - make sure whatever structure you choose, you're keeping meticulous records. Trading businesses get audited more frequently than other types of businesses, so having everything properly documented from day one is crucial.