CPT Tax Implications & Record Keeping 2 — Questions and Answers
Question 1: A trader who qualifies for trader tax status (TTS) may deduct trading-related expenses on which IRS form?
- Schedule D
- Form 4797
- Schedule C (Correct answer)
- Form 8949
Correct answer: Schedule C
Traders with TTS status report business expenses on Schedule C, allowing deductions not available to investors.
Question 2: Under the wash-sale rule, if you sell a stock at a loss and repurchase the same stock within how many days before or after the sale, the loss is disallowed?
- 15 days
- 30 days (Correct answer)
- 60 days
- 90 days
Correct answer: 30 days
The wash-sale rule disallows a loss if the same or substantially identical security is purchased within 30 days before or after the sale.
Question 3: Which tax election allows eligible traders to mark all open positions to market on the last day of the tax year, converting capital gains/losses to ordinary income/loss?
- Section 475(f) election (Correct answer)
- Section 1256 election
- Section 199A election
- Section 1031 exchange
Correct answer: Section 475(f) election
The Section 475(f) mark-to-market election lets qualifying traders treat unrealized gains and losses as ordinary at year-end.
Question 4: For a trader filing as a sole proprietor with TTS, how are net trading profits subject to self-employment (SE) tax?
- All net trading profits are subject to SE tax
- Net trading profits are never subject to SE tax (Correct answer)
- Only profits from stocks held less than one day are subject to SE tax
- Only profits exceeding $50,000 are subject to SE tax
Correct answer: Net trading profits are never subject to SE tax
Trading gains, even for TTS traders filing on Schedule C, are generally not subject to self-employment tax because trading is not considered a 'trade or business' for SE tax purposes.
Question 5: What is the holding-period threshold that distinguishes a short-term capital gain from a long-term capital gain in the US?
- 6 months
- 9 months
- More than 12 months (Correct answer)
- More than 24 months
Correct answer: More than 12 months
An asset held for more than 12 months qualifies for long-term capital gains rates, which are lower than ordinary income rates.
Question 6: Which IRS form is used to report individual capital gains and losses from sales of stocks, bonds, and other capital assets?
- Form 1099-B
- Form 8949 (Correct answer)
- Schedule E
- Form 4797
Correct answer: Form 8949
Form 8949 is used to report sales and other dispositions of capital assets, with totals flowing to Schedule D.
Question 7: A trader receives a 1099-B from their broker showing proceeds of $200,000 and a cost basis of $185,000. What is the trader's reportable capital gain?
- $200,000
- $185,000
- $15,000 (Correct answer)
- $385,000
Correct answer: $15,000
Capital gain equals proceeds minus cost basis: $200,000 − $185,000 = $15,000.
CPT Tax Implications & Record Keeping 2
A trader who qualifies for trader tax status (TTS) may deduct trading-related expenses on which IRS form?