Offering Advice & Services to Traders | Investors | Funds
Welcome to Capital Management Services Group
U.S. Tax and International Traders and Investors
Hedge Fund Mark to Market Election
Customer Testimonial I would like to state unequivocally that I have had a completely positive experience in dealing with Capital Management Services Group. Truly, from the first phone call that I made to Capital Management and Barry Shapiro speaking with me, to the conference call that he arranged between the two of us and Hannah Terhune and the time that she took in answering all of my questions, and, finally, to the follow-up by Amy Hong, my case, establishment of a Forex Incubator Fund, has been thoroughly handled. Hannah Terhune responded promptly to my subsequent phone calls and Amy Hong is absolutely 100% efficient. I, certainly, plan to enlist Capital Management's services for my legal needs in the future concerning fund management. I would rate my experience and results 5 out of 5 stars! Totally satisfied, Rxxxxxx Sxxxx, Sept.22, 2010
Mark-to-Market Tax Treatment Section 475(f) of the tax code allows an active securities trader to treat all securities as: generating ordinary income or loss, and if held at year-end, marked to market (treated as sold for fair market value on 12/31 and then repurchased at that value on 1/1). Mark-to-market refers to the procedure followed at year end when all open positions are marked to market value. In effect a sale of all open positions (long and short) is triggered for tax purposes at year end using the year end market prices. On the first day of the following year those positions are bought back for the same market value. This tax treatment flushes out all realized and unrealized gains and losses for U.S. tax reporting purposes. Confused? Only if you have to file a U.S. tax return. MTM applies only to trading gains and losses and not to business expenses. An active trader may elect MTM for trading gains and losses and use the accrual or cash method of accounting for business expenses.
Should I Consider a MTM Election? Only someone who qualifies as an active securities trader can elect MTM treatment. Although the MTM election can be made in a year in which you qualify as an active trader, the MTM election once made applies to subsequent years whether or not you are an active trader in later years. Before Electing Mark-to-Market Tax Treatment The decision making process is influenced by the fact that this election is a permanent election that can be revoked only with the consent of the IRS. However you could still establish an investment securities account or an investment company whose positions are outside the scope of the election. Trades in these other accounts generate capital gain or loss. Futures contracts (such as most index options) in mark-to-market accounts are still entitled to special tax treatment. MTM is not a preferred accounting method for profitable commodities and futures traders as the default tax rates favor them: 60% long term and 40% short term capital gain. The current maximum blended tax rate on commodities and futures is 23% versus 35% on securities. Electing MTM converts commodities and futures trading capital gains and losses (60/40 treatment) to ordinary gain and loss treatment (a 12% tax rate increase). But if you have large commodity trading losses before April 15 of the current year, electing MTM will allow the losses to be treated as ordinary.
Some Strategies for Making the Election 1. As the election is specific to the active trader, it is best made by an entity, rather than an individual taxpayer. An S corporation is easier to liquidate than an individual. The individual unhappy with his or her election needs to cease trading activities and become inactive (trading in the interim should be conducted through an entity) so that trading status lapses.
2. Make sure you (or your entity) are an active securities trader. There is no bright line test for trader versus investor status based on what little legal precedent exist. Make sure you have significant portfolio turnover on an annualized basis. Other factors (use of a margin account, options, futures, and short selling) can support active trader status.
3. The election for an active trader must be made by the original due date of his tax return for the current year with no exceptions. For a new trading entity, you must elect within 75 days of the start of trading activities, and then include the election in the entity's first tax return.
4. If your mix of positions includes both active trading and buying some positions (or taking some shorts), for the longer term you should establish an investment securities account. This account can be at the same brokerage where your active trading account is maintained.
Hedge Fund Managment and Taxation of the Limited Liability Company (LLC) One benefit of the use of limited liability company is the flexibility of being able to choose how the entity is taxed. There are many factors to consider when deciding to have your LLC taxed. Your choice should be based on your own specific situation. Therefore, before making any decisions on your form of business, you should speak with us.
Single Member LLC (SMLLC) By default, an LLC is treated as a pass-through entity, which means that it does not pay U.S. tax directly, but its income or loss is allocated to the owners, who then pay taxes on that income. If the LLC has one member, it files no tax return and the transactions of the LLC are treated as transactions of the owner for tax purposes. In effect, it is disregarded for U.S. tax purposes. A single member LLC is treated as though it does not exist for tax purposes and thus the owner is treated as if he were running a sole proprietorship. All transactions (income and expenses) are included on the owner’s U.S. tax return. Therefore, no separate tax return need be filed for the LLC.
Multi Member LLC (MMLLC) If the LLC has more than one member, the LLC can opt for treatment as a partnership for U.S. tax purposes. Income and losses of the LLC are allocated to the owners, who pay taxes on that income regardless of the amount of cash they received from the company. A distribution of cash to owners is itself a tax-free event. The owners of the LLC can be compensated for service to the company (called “guaranteed payments”) in which case the payments are treated as an expense to the partnership and income to the owner. Subchapter K is quite flexible, and allows the owners to allocate the income between themselves in a variety of ways, sometimes in quite complex formulas (subject to certain limited restrictions in the Internal Revenue Code). When using a partnership tax approach, the income of the partners is generally subject to the self-employment tax.
Corporate Tax Option The owner(s) of an LLC, whether the LLC has a single member or multiple members, may choose to have their LLC taxed as a corporation. In this case, the LLC can be taxed as a C Corporation (or, if the owners are U.S. persons, an S Corporation). The ability of LLC owners to elect the LLC's method is called “checking the box" via filing Form 8832.
U.S. Regular Corporation Tax If an LLC elects to be taxed as a regular ("C") corporation, it is treated for tax purposes, as if it were a corporation. The company must file a corporate tax return (regardless of whether there is one member or multiple members) and the LLC itself pays taxes. Any income that is paid to owners in the form of dividends is also taxable income to the owner (resulting in double taxation), though taxed to the owner at the capital gains rate. As a result of the exposure to double taxation, many C Corporation owners pay themselves a salary or bonus. Such income is deductible to the corporation, as long as it is "reasonable." If the IRS determines otherwise, it can reclassify part of the salary as a constructive dividend and charge the company additional tax (and assert penalties).
S Corporation Tax for U.S. Persons Only If an LLC elects Subchapter S, it is treated for federal tax purposes, as if it were a corporation that elected to be treated as an S Corporation. In this case, the LLC files a corporate tax return but does not itself pay taxes. Instead, each owner is allocated a portion of profits or losses based on the percentage interest that they each own. As in a partnership, the owners must then pay the taxes themselves, regardless of whether any cash has been distributed to them. Any cash payments to owners (called distributions or dividends) are tax-free. Active owners are considered employees of the company and can also be paid for their services to the LLC in the form of a salary or other payments. In that case, the payment is deductible. The benefit of taxing an LLC as an S Corporation is that income that is not paid out as a salary is not subject to self-employment taxes. However, the IRS can scrutinize the salaries paid to owners and decide that the owners are underpaid. If it does, the IRS may reclassify some of the LLC’s income as wages, subjecting the LLC and the owners to additional payroll taxes and potential penalties.
Another disadvantage to using Subchapter S is that the designation is conditional. There are a number of requirements the company must adhere to (such as having only one class of stock). If the company fails to adhere to these requirements, it will automatically be converted to a C-Corp and face double taxation. The single class of stock requirement is especially easy to violate inadvertently. If the LLC gives any owners preferred distributions or distributes distributions in any way except through a straight pro rata method, it could be deemed as having more than one class of stock. In addition, many of the default provisions in LLC statutes violate the single class of stock requirement, which means that the operating agreement of an LLC taxed under Subchapter S must be carefully written to override the default provisions.
International Traders Many international traders own U.S.-brokerage accounts and wonder if they will owe U.S. taxes. When a nonresident trader has a U.S. brokerage account, only interest and dividends earnings are subject to U.S. withholding tax. No U.S. withholding tax should apply to capital gains. Many brokerages will withhold taxes anyway. Nonresidents (individual or business) can file for a tax refund using a Form 1040NR and then properly structure their U.S. focused trading to prevent mistakes in the future. In most cases, U.S. tax liability does not arise. However, ownership in a "landed" U.S. business activity can trigger a U.S. tax bill and filing. If a nonresident trader owns a U.S.-brokerage account and spends more than 183 days in the United States (meeting either U.S. substantial presence test), U.S. source net capital gains are subject to U.S. tax. Most U.S. tax treaties contain provisions that reduce or eliminate tax on capital gains. The trader could also make a mark-to-market election for the trading activity to be taxed at lower rates. Being part of a U.S. proprietary trading firm business on a K-1 or W-2 basis triggers exposure to U.S. taxation. U.S. Taxes The United States taxes citizens, businesses and residents on worldwide income. It also taxes nonresident individuals (meaning no green card or long-term U.S. presence) and businesses on U.S. source income at tiered rates based on net taxable income. Most other U.S. source income is taxed at a flat 30% rate through payer withholding. Withholding taxes often are reduced or eliminated in the case of payments to residents of countries with which the U.S. has an income tax treaty. In addition, certain statutory exemptions from withholding taxes are provided. Income of a non-resident alien individual or foreign corporation that is effectively connected with the conduct of a trade or business in the United States is subject to tax at the normal graduated rates based on net taxable income.
Deductions are allowed in computing effectively connected taxable income (ECI). Withholding taxes often are reduced or eliminated in the case of payments to residents of countries with which the U.S. has an income tax treaty. In addition, certain statutory exemptions from withholding taxes are provided. U.S. source non-ECI connected capital gains of non-resident alien individuals and foreign corporations generally are exempt from U.S. tax, with two exceptions: (1) gains realized by a non-resident alien individual who is present in the U.S. for at least 183 days during the taxable year, and (2) certain gains from the disposition of interests in U.S. real estate. The source of income received by non-resident alien individuals and foreign corporations is determined under rules contained in the Internal Revenue Code (Code). Interest and dividends paid by a U.S. citizen or resident or by a U.S. corporation generally are considered U.S. source income.
Why Hire Us? We have advised investment advisers, financial planners, and accountants on matters such as investment adviser registration, investment advisory agreements, investment suitability, state/federal compliance issues, the avoidance of client and regulatory complaints, and potential conflicts of interest.
Small- to medium-size clients often rely upon us as an "outsourced" legal counsel and compliance adviser. We provide these services to many investment advisers at a great savings over the cost of hiring and maintaining a legal department. We regularly assist the legal and compliance departments of medium to large size investment advisory firms. We represent large advisors with significant internal legal capabilities who seek to leverage our extensive experience in complex issues and the latest developments. We have been an active counselor in numerous transactions involving the purchase, sale, or merger of investment advisory practices.
We regularly provide advice regarding securities, derivatives, tax, ERISA, litigation and other legal matters to a variety of registered investment companies and hedge funds. Additionally, we provide assistance with the formation and operation of mutual funds, hedge funds, venture capital funds, and other private equity and commodity pools. We also provide compliance services, including analysis and development of compliance policies and procedures, compliance audits, and draft disclosures and responses to SEC examinations and document requests.
We have acted as counsel to limited liability companies, commodity pools, and open-end and closed-end funds registered with the SEC. We represent broker-dealers and other securities professionals in their capital market transactions and regulations, advising them on all aspects of U.S. federal and state securities and commodities laws, including regulation by the national securities exchanges, the NASD and other self- regulatory organizations, and assisting them with respect to regulatory audits, continuing education, licensing, and enforcement matters.
CapitalManagementServicesGroup.com is recognized by discriminating fund managers and traders as being the foremost tax and legal authority in the business. Attorney Hannah Terhune's education and experience are unsurpassed in the area of hedge funds creation and management platforms, and the complex body of tax laws related thereto. Ms. Terhune's exensive knowledge and experience have made her an indispensable resource for serious fund management and trading professionals. Ms. Terhune's articles on the subjects have appeared in over 100 publications worldwide. Chances are, if you have read about the above matters, Ms. Terhune has written about them. Give us the opportunity to use that knowledge and experience for you. CMSG provides the best services and support needed for hedge fund projects and associated activities in one convenient place, saving you time and energy. No need to coordinate work between different firms; we handle the entire process from start to finish. We offer hedge fund and money management accounting, tax services, tax preparation, consulting, entity and retirement plan formation services. Our professionals provide the highest quality services at competitive rates. But don't take our word for it, give us a call and let us prove what we can do for you.
Personal Consultations and Fees You get answers to your specific questions by speaking directly to Hannah Terhune, an experienced hedge fund attorney. Ms. Terhune's hard-earned knowledge and experience can be put to work to save you unnecessary steps and costly wasted effort. The consult is an invaluable opportunity to speak to Hannah one-on-one, and learn how to achieve more in less time. As a result, you can anticipate that the return on your investment will far outweigh the costs associated with our unsurpassed services. Of course, fees are a necessary part of the consultation. Ms. Terhune's credentials reflect an invaluable resource that combines a well-informed professional practitioner with sound ethical judgment that cannot be over-estimated. The expertise required to recommend best solutions and provide sound advice should never be taken lightly. We are confident that when you are finished with your consultation, you will be impressed and more informed about your business plans than ever before. Call (307) 213-4732 or Click Here to Request Services.
Our Commitment Henry David Thoreau wrote: "Do not hire a man who works for money, but him who does it for love of it." We are committed to your business plans and bringing you the best possible options. We are an established and internationally recognized business that serves and educates our clients throughout the industry. We do this by striving for the best results. Above all, we are a law firm. A lawyer is a philosopher and role model. The ability to improve our clients' lives is a privilege that we do not take lightly. There is tremendous power in being able to effect a positive change in our clients' lives. Our aim is to welcome our clients and to provide a comfortable, warm environment for all. We believe that making our clients feel comfortable and confident with the process provides the basis for a constructive relationship built on mutual trust. time. Thanks for visiting our website. We hope to have the opportunity to serve you.