TAX ISSUES FOR INVESTORS & TRADERS Stacy A. Sand, CPA TAX (8829)

Average Investor INTEREST & DIVIDENDS Interest Income is taxed as ordinary income Regular Dividends or Ordinary Dividends a distribution made by a corporation to its shareholders, cash or other property, out of its annual or accumulated earnings and profits. Regular or Ordinary Dividends are taxed as ordinary income Examples are any stock held under 60 days

Average Investor Qualified Dividends Dividends paid by a domestic corporation or qualified foreign corporation and received between 1/1/03 and 12/31/10. The stock must meet the holding period of 60 days in the 121 day period beginning 60 days before the ex-dividend date (date when dividend is declared) unless it is preferred stock (must meet the holding period of 90 in the 181 day period) Qualified Dividends are taxed at Capital Gains Rates. Before 2008, those rates were a maximum of (15% or 5% for those in a 10-15% tax bracket.) New Rules for 2008 – 0% rate for those in the 10-15% bracket!!! They do not pertain to tax deferred accounts Dividends that are not qualified are capital gains distributions, dividends paid on deposits with mutual savings banks, cooperative banks, credit unions, US Building and loan associations and other similar institutions Undistributed Capital Gains from mutual funds and REITs are not dividends. They are reported on form 2439 and treated as long- term capital gains.

Average Investor Capital Gains/Losses Long term vs. Short term (>12 month holding period) Reported on schedule D Long term capital gains are taxed at max of 15%; however, starting in 2008, if your tax bracket is 15% or below, this rate will not be ZERO!!! Short term are taxed at your bracket Examples as it pertains to our topic are all securities excluding: commodities derivative financial instruments held by dealers and hedging transactions and transactions as a trader may or may not qualify Losses are allowed up to $3,000 per year and carried forward until exhausted

Average Investor Collectibles are not capital and are taxed at a max rate of 28%. They include metals such as gold, silver and platinum bullion Margin Interest Allowed up to the amount of net investment income on schedule A. Able to carry over to succeeding tax years Investment Expense Reported on Schedule A; subject to the 2% floor Not carried over to future tax years Examples include: investment counsel fees, custodian fees, fees for clerical help, rent, publications and state and local transfer taxes

Average Investor Wash Sale Rule A taxpayer who realizes a loss upon a sale or distribution of stock or securities may not take a deduction for the loss if: Within 30 before date of sale or 30 days after sale the same stock or security is purchased If you are subject to the wash sale rule and your loss is not allowed, you simply add the disallowed loss to the basis of the new purchase; thereby cost averaging, which applies to the next sale.

Average Investor Foreign Tax Credit A credit or deduction against US tax for taxes imposed by foreign countries and certain possessions of the US. Can deduct as an itemized deduction on schedule A as foreign income taxes paid or accrued or it is usually more advantageous to Apply as a credit against your US tax liability by filing form 1116 If under $300 ($600 if married) you may claim the credit directly on form 1040 if tax was paid on passive income and was reported on a form 1099.

Average Investor Exchange Traded Funds and Notes Commodity ETFs – Collectibles and Futures ETF’s which hold collectibles, such as gold & silver are taxed at a maximum rate of 28%. Long positions closed out within 12 months or for short positions covered by a closing purchase, ordinary income rates (as high as 35%)apply ETF’s which hold futures, such as USO- United States Oil Fund and other power shares are taxed as if all were sold on the last day of the year. 60% of the gains/losses are treated as long-term, while 40% is treated as short. The maximum bracket for these is 23% regardless of the holding period Currency ETNs Just a quick note that since December 2007, the IRS has changed the rules on them. Prior, they were taxed as capital gains/losses subject to regular capital gains rules; however, this was changed and now they are taxed as ordinary up to 35%. There went that break!

Average Investor Commodity ETNs There are no portfolios here, so these are senior long term debt instruments issued by a bank of financial institution that promises to pay investors the note’s face amount at maturity. These are prepaid contracts for tax purposes There is no liability during the holding period Capital gains/losses are realized upon the sale and the max rate for short-term is 35% THE IRS HAS YET TO RULE ON THE TAXATION OF OTHER ETNs

TRADERS IN SECURITIES How to get Trader Status with the IRS Make the election for market-to-market by the due date of the tax return for the year prior to the year that it is effective After the election is made, you must change your accounting method as well

TRADERS IN SECURITIES What you must do to have it approved You must meet all of the following conditions You must seek to profit from daily market movements in the prices of securities and not from dividends, interest or capital appreciation Your activity must be substantial You must carry on the activity with continuity & regularity You can have some activity as a trader and some as investor Remember the IRS can give you the status and take it away at any time. That is why you must be sure that you always qualify.

Trader versus Investor What are the differences between a Trader and Investor tax wise? Activities are reported on schedule C and 4797 Part II versus B and D. No self-employment tax will be imposed Gains & losses from the sale of stock & securities will be treated as ordinary instead of capital for traders Capital loss limitations and wash rules do not apply to traders No limits on interest expense as is with investors. Again, reported on schedule C