CPT Tax Implications & Record Keeping 3 — Questions and Answers
Question 1: Futures contracts traded on a regulated exchange are typically taxed under which IRS rule that applies a blended 60/40 long-term/short-term rate?
- Section 1245 rule
- Section 1256 rule (Correct answer)
- Section 1031 rule
- Section 1202 rule
Correct answer: Section 1256 rule
Section 1256 contracts (e.g., regulated futures) are taxed at a blended 60% long-term / 40% short-term capital gains rate regardless of holding period.
Question 2: A trader uses a home office exclusively for trading. Which condition must be met for the home office deduction to be allowed under TTS?
- The office must be used only occasionally for trading
- The space must be used regularly and exclusively for trading business (Correct answer)
- The trader must own the home, not rent it
- The office must be at least 200 square feet
Correct answer: The space must be used regularly and exclusively for trading business
IRS rules require that the home office space be used regularly and exclusively for the trade or business to qualify for the deduction.
Question 3: Which of the following best describes the 'substantially identical security' concept in the context of the wash-sale rule?
- Securities from different issuers in the same industry
- Options or warrants on the same underlying stock you sold at a loss (Correct answer)
- ETFs that track a similar but different index
- Bonds and stocks of the same company
Correct answer: Options or warrants on the same underlying stock you sold at a loss
Buying options or warrants on the same stock sold at a loss is considered acquiring a substantially identical security, triggering the wash-sale rule.
Question 4: When a trader carries forward a net capital loss to the next tax year, the maximum amount of capital loss that can offset ordinary income in a single year is:
- $1,500
- $3,000 (Correct answer)
- $5,000
- Unlimited
Correct answer: $3,000
Non-corporate taxpayers may deduct up to $3,000 of net capital losses against ordinary income per year, carrying the remainder forward.
Question 5: A day trader who has NOT made the Section 475(f) election sells a stock at a loss and repurchases it the next day. The tax result is:
- The loss is fully deductible in the current year
- The loss is deferred and added to the cost basis of the repurchased shares (Correct answer)
- The loss is permanently disallowed
- The loss is converted to ordinary income
Correct answer: The loss is deferred and added to the cost basis of the repurchased shares
Under the wash-sale rule, a disallowed loss is not permanently lost but is added to the cost basis of the replacement shares.
Question 6: Traders who establish a trading entity (e.g., LLC or S-Corp) may use which retirement account to shelter trading profits and reduce taxable income?
- Roth IRA
- SEP-IRA or Solo 401(k) (Correct answer)
- Traditional IRA only
- 529 College Savings Plan
Correct answer: SEP-IRA or Solo 401(k)
A SEP-IRA or Solo 401(k) allows self-employed traders with earned income through an entity to make tax-deductible retirement contributions.
Question 7: For record-keeping purposes, the IRS generally recommends traders retain trade confirmation records and brokerage statements for at least how many years?
- 1 year
- 3 years
- 7 years (Correct answer)
- 10 years
Correct answer: 7 years
The IRS recommends keeping records for at least 7 years to cover the statute of limitations for audits involving fraud or substantial understatement of income.
CPT Tax Implications & Record Keeping 3
Futures contracts traded on a regulated exchange are typically taxed under which IRS rule that applies a blended 60/40 long-term/short-term rate?