One of the biggest questions asked - other than "How do I make a profit?" - is how do I file my taxes.  As trading filing rules are a little more complex than your simple 1040ez statement, FuturesKnowledge.com has put together a list of informational suggestions with the help of GreenTraderTax.com that should guide you through this process.  Please note - we are not a certified accountant, therefore, you should verify all of your tax questions with either your local or national government offices (AKA: IRS Knows Best!).

Extensions of Time to File [Return to Traders Tax Home Page]

1st Automatic Extensions

• If you are not ready to file your 2001 individual income tax return by April 15, 2002, the due date, you are entitled to file a federal Automatic Extension by April 15, 2002. Some states accept the federal extension but most require their own form.
• Filing "valid" extensions by April 15 automatically changes your tax return due date to Aug. 15, 2002.
• A "valid" extension means that you must pay a minimum of 90 percent of your 2001 tax liability (for federal liability; some states differ) with the extension filing. This is not an extension to pay your tax – it is only an extension to file the tax return.

2nd Extensions

• If you are still not ready to file your 2001 individual income tax return by Aug. 15, 2002, the 1st extended due date, you are entitled to file a federal 2nd Extension by Aug. 15, 2002. Some states accept the federal extension but most require their own form.
• A "granted" 2nd Extension changes your tax return due date to Oct. 15, 2002. 
• The 2nd Extension is not automatic (unlike the first extension) and you need to receive it back from the IRS marked "granted." When you file the extension form, you need to include a reason for the extension. The reason can be something such as, "taxpayer is awaiting additional expense documentation and a complete and accurate tax return can not be filed at this time." For all practical purposes, these extensions are automatic. We have never had one not granted in more than 23 years of CPA tax practice.

Why we recommend 1st & 2nd Extensions for many Taxpayers and Traders

• With the 1st Automatic Extension, you get an additional four months to work on your tax return. With the 2nd Extension, you get an additional two-months more. We need this additional time to make sure the tax returns for our Trader Clients are accurate and have the best tax savings results.
• Many traders have trading losses for 2001. Many of these traders with mark-to-market (MTM) accounting will be entitled to file a Net Operating Loss carryback refund claim on Form 1045. See our article in Active Trader magazine explaining what a Form 1045 carryback claim is ("Get the refund you deserve..."). Filing a Form 1045 refund claim is tantamount to filing amended tax returns for your prior two tax years. This process takes time and requires care. Additionally, the IRS will review these Form 1045 refund claims, and we believe you are better off waiting until after April 15, 2002, when fewer agents are around to look over returns. This same concept works for all taxpayers.
• Most Traders have complex tax files because they have Trader tax status. Traders usually don't complete their own trade accounting and record organization until the middle of March. We, the tax preparation firm, don't receive your tax information until March. We then only have one month to complete your tax return.
• Often times, we need to request additional information from you. For example, if you have elected MTM, you might not have handled the opening and closing MTM values correctly. If you are cash basis (i.e., you haven’t elected MTM), you might not have handled wash sales correctly. Maybe you have not taken full advantage of home-office deductions and all the expenses you are entitled to. We need more time to work with you to get it all right and prepare the return that is most advantageous to you.
• Many of our trader clients elected MTM accounting for the first time in 2001. This requires additional work on our part – we have to prepare a Form 3115 for 2001.
• Here’s the bottom line: Both you and Green Trader Tax need more time to prepare and file a proper trader tax return. Waiting will reduce the risk of getting examined by the IRS and improve the results.
• The key is knowing whether or not you may owe money with the extension. Traders with large losses are surely in refund situations, and filing the extension is easy. Traders with large gains owe money, and we need to prepare most of your tax return to see what you owe.

In our opinion there are many advantages and no disadvantages to using 1st & 2nd Extensions

• The only possible disadvantage is delaying a refund.
• For traders with large losses and carryback refunds (see Form 1045 above), we pointed out the risks of filing early. So, be patient and file in May or June.
• There are many advantages:
• You have more time to file and work out a better and more accurate tax return.
• You can consider your 2002 activity and how that may affect your tax-filing strategy for 2001. For example, if you start to generate large income in 2002, you might want to be more aggressive in 2001.
• In our opinion, waiting lessens your chance of being audited by the IRS or your state tax authority. Many IRS examinations are selected before you file, and many IRS agents are reassigned for training or other duties after the tax-filing season crunch ends on April 15. Most sophisticated taxpayers and wealthy individuals always file close to the last possible day – after the second extension is due Oct. 15, 2002.
• Read newspapers such as The Wall Street Journal around April 15 and Aug. 15. There will be stories about the many advantages of 1st and 2nd Extensions.
• In this case, “the early bird gets the worm,” but you are the worm and the IRS is the bird. Patience is a virtue. That does not mean laziness, however, so get your numbers together and file an accurate extension.

Our Extension filing strategies

• Some Traders owe estimated taxes for the first quarter of 2002. With an Extension filing, you can skip the first quarter estimated tax payment and instead pay an extra amount with your Extension for 2001. When you file your 2001 tax return, you can apply the overpayment credit towards 2002 estimated taxes.
• This strategy "kills two birds with one shot." You overpay 2001 taxes to give yourself a cushion against inaccurate estimates (or changing your mind about being aggressive on expense deductions or other tax-savings strategies) and you pay your 2002 first-quarter estimates. If it turns out you have very little or no credit towards 2002, then you just pay more estimated taxes for June 15th or Sept. 15th. Your tax return looks better showing a credit applied rather than a refund requested.
• As a default for all Traders who did not use Mark-to-Market accounting for 2001, we will be including the 2002 MTM Election with the Extension filing. The MTM election is due with the extension by April 15, 2002
• f MTM is not wise for you, we will discuss the situation with you and not include the MTM election with the extension.

The consequence of not filing a "valid" extension and filing a "late" tax return

• If you file your tax return "late" (i.e., after the valid extension due date or without a valid extension), you will be subject to tax penalties and interest assessed on the amount of taxes you owe. If you have an overpayment return (refund), then no penalties or interest are assessed. Some states may charge a small penalty even if the taxpayer does not owe any money. 

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DISCLAIMER:  Futures Trading involves a huge risk of financial loss!  FuturesKnowledge.com is a traders research and resource site - and is not meant to be used as a guide for trading.  Due to the large risk involved - we highly recommend that you consult with a number of different resources before attempting to invest in the futures, commodities, options, or any other market we report on.

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