The Importance of Knowing Whether You Have an Investment or a Business Activity

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One of the shocking changes that came from the Trump tax plan had to do with investment deductions. In the past, there has been a limit on how much investment expense deduction you can get, but you still could take a deduction.

Now, effective with the January 1, 2018 tax year you cannot take any investment deduction at all. That’s because the miscellaneous itemized deductions are gone.

So, when does your investment activity actually become a business? This is an important question because business expenses are still allowed deductions.

While we don’t have a lot of guidance from the new Trump tax plan, we can look at past tax court rulings. In one case called the Groetzinger case that went before the Supreme Court, the Supreme Court found “we conclude that if one’s gambling activity is pursued full-time in good faith and with regularity to the production of income for livelihood it is not a mirror hobby. It is really a trade or business within the meaning of the statues with which we are here concerned.”

In this particular case, Groetzinger was a gambler. He won over $70,000 but lost about $72,000 in one year. He wanted to take the full amount of the loss as a deduction. Because he worked so hard and regularly at the gambling, in this case dog racing, the court allowed it.

However, in numerous other cases where people are involved in stock investing and hire stockbrokers and other specialists to help them, the IRS has regularly ruled that these are NOT businesses.

That means that there are no business deductionsavailable. From these two different case situations, we have come up with a day trading exemption. If you were involved in continual and regular activity with trading and the stock, you buy is for short term only (such as day trading) then this is a business.

You do have to make the proper elections with the IRS in the proper timeframe. But when you do, you still have the right to take the deductions.

Otherwise effective with 2018 you do not have any possibility of write-offs for these investment expenses.

The question that still remains is how to treat crypto currency investing. Crypto is not considered a security, so it seems that you cannot take advantage of this day trading option. Therefore, all of your expenses related to cryptocurrency will not be deductible.

The exception is if you have a business. For example, if you are mining crypto, that is a business. You then have deductible business expenses. This is the confusing part of the law right now and we’re still working out all the nuances of how the Trump tax plan impacts taxpayers. Make sure your strategy is up-to-date and don’t rely on old information. Please contact Richard at 888-592-4769 to see how we can help you with your tax strategies and tax compliance issues.

We want you to keep more of your hard-earnedmoney!


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