I bought a house, business expense?

Question

So I do day trading at home - it uses to be an apartment but it was a good year and I bought a house outright.

Can I deduct the space I utilize in my home as a business expense on next year's taxes?

Also do I need a business license to be able to claim business expenses?

John Newburg · Answer

It does, thank you.

And yeah I've been contemplating an LLC - I'm in California but an extremely rural area.

May need to drive 5 hours or so to get to the Bay area and find someone potentially familiar with day traders lol.

Stephen Huff · Answer

Hi John - Congratulations on the good year! ;^)

If I remember right, you can deduct an amount of the expenses based on the size of office space compared to the whole house. For example, if you exclusively use one 10' x 15' bedroom (150 sq ft) for your day trading, and the whole house is 2,000 sq ft, then the percentage is 150/2000 = 7.5%.

But if you purchased outright, does this mean you have no mortgage? If so, then you can't deduct the mortgage interest, but you can deduct a portion of property tax.

And you will have some other expenses such as Internet and maybe mobile phone costs - but you will need to separate out "personal use" vs. business use. Plus, you'll have to see if there were any fees the brokerage house charged you that can be used to reduce the capital gains from the trading profits.

As others who respond here will probably say, you should contact a good CPA who is very familiar with day traders and home office business expense. There are a lot of "rules" that sometimes change every year, so your CPA/tax guy needs to be current in his/her knowledge about this area.

Lastly, I don't think you'll need a business license, but you should check with your local city and county offices on their rules. As a "sole proprietor" you end end up paying self-employment taxes because you're both an employer and employee. If you set up an LLC, you might be able to save in some areas, but pay in others (for example, here in California, we get to pay $800 a year just for the LLC registration, regardless if any profit was made). Again, talk to the tax pro.

Hope this helps . . .

Brandon H. · Answer

While there is a home office deduction in the tax code, it needs to be a separate, dedicated space (i.e. with walls around it) in your home used exclusively for business (i.e. no mixed use).  My understanding is that this deduction is often misused and may cause you to be more likely to be audited.  The point of this is that, while you may be able to take a deduction, make sure you are 100% out of any grey areas.  Play it safe since the deduction ends up being fairly minimal.

Lastly, talk to a professional.  No online forum can replace real personal/professional expertise.

Brent Coombs · Answer

@John Newburg, whatever portion of your primary you elect to utilize "for business/tax purposes", be mindful that the same portion will be excluded from capital gains exemption, when selling your primary (afaik).

Something to think about? Check with your tax accountant? Welcome to BP...

John Newburg · Answer

This may get trickier, I trade cryptocurrencies - I do close to 200 trades a day at a minimum.  So I believe I qualify as a trader as opposed to an investor however I do have some long term investments.

Income started with my job (I still work) and birthdays/holiday money.

I think I'll wind up being a trader, securities though may be the grey area for my current situation though.

Ashish Acharya · Answer

@John Newburg ,  this is lengthier discussion compared to a simple question you asked.

It depends on if IRS considers you an investor or trader.

they look at different factors, I pulled court cases where they looked at these:

(1) the taxpayer's investment intent;

(2) the nature of the income to be derived from the activity; and

(3) the frequency, extent, and regularity of the taxpayer's securities transactions (Kay; Mayer; and Moller)

A taxpayer is a securities trader only when both of the following are true:

(1) the taxpayer's trading activity is substantial; and

(2) the taxpayer seeks to profit from short-term swings in the daily market movement, rather than to profit from the long-term holding of investments.

Thus, it is important to look at such factors as the number of trades, the average holding period, the sources of income, the taxpayer's ongoing involvement in the activity, and the percentage of available trading days on which trading activity occurred (Holsinger).

If you are a trader, you have the option to take home office deduction as an ordinary business expense. You have to meet rules for home office deduction.

if you are an investor, The expenses they incur in connection with investing activity are treated as Section 212 expenses incurred for the production of income. These expenditures were deductible before 2018 as miscellaneous itemized deductions subject to the 2%, but not after 2018 because whole "miscellaneous itemized deductions subject to the 2%" is out of the window.

I bought a house, business expense?

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