Every year that you trade commodities, you will have to claim any profits you make on your income tax return and pay the applicable taxes. Do not despair; it should be a painless process once you know which forms you need to use.
The following summary of tax issues relating to commodity trading, with an example of calculations for your own tax return, will shed some light on the process.
Taxes on Commodity Trading
You should receive a 1099-B Form from your broker before January 31. It will state your profits and losses from the previous year’s commodity trading. Subtract the losses from your profits, and that will give your capital gains.
There are favorable federal tax rates for commodities as they are taxed at 60% long-term capital gains and 40% short-term capital gains. Long-term gains are capped at 15%, and short-term gains are taxed at your ordinary tax rate, which depends on your adjusted income.
You do not have to worry about accounting for and listing each individual trade on your tax returns. You just need to know your net profit or loss.
Typical Filing Examples
Assume that you traded futures all year, and estimate that you netted a $5,000 profit for the year. To make certain, you wait to receive your 1099-B form from your broker. This is probably titled 1099-B Proceeds from Broker and Barter Exchange Transactions. It will list your profits and losses for the year.
You will need to use an IRS Form 6781 to submit your information for tax purposes.
The IRS considers commodities and futures transactions as 1256 Contracts.
On the form's line 1, enter your gains and losses from your 1099-B Form. Continue to the place on the form where you add the profits and losses to get a final number. For example, this number may be a profit of $5,000.
Commodities are marked to market at the end of the year. This means that if you have open positions, they will be calculated as profits and losses as if they were closed positions using the price on the final day of the year.
Now, you have to calculate the capital gains. Commodities have a slightly more preferential tax treatment than stocks. With commodities, 60% of the gains are treated as long-term capital gains and 40% are treated as short-term capital gains, regardless of how long you held the contracts.
Follow lines 8 and 9 and calculate your capital gains. In this example, on line 8 of Form 6781, you would multiply $5,000 x 40% = $2,000.
On line 9, you would multiply $5,000 x 60% = $3,000. Plug these numbers into your Schedule D Form—Capital Gains and Losses. After you complete the Schedule D calculations, transfer the numbers to your 1040 Form and you are done.
There are a few more in-depth issues that pertain filing taxes for commodity trading, but the above information for taxes on commodities should cover most people who do not strictly trade for a living.
Trader Tax Status
There are some favorable issues for those who can claim trader tax status. To qualify for trader tax status, you must be a full-time trader whose work is considered a business. If you trade via a stock app a few hours a day, it's likely that the IRS will consider you an investor and not a trader.
With a trader tax status, you can claim your losses and any business expenses as ordinary losses and they can be deducted directly from your income. Also, the losses are not subject to the maximum of $3,000 in capital losses.
Gains and losses that traders experience through selling securities aren't subject to self-employment tax.
Tax Policy Can Change so Consult a Professional
Always keep in mind that tax policy can change on the Federal and local level. Therefore, it is always wise to consult a tax professional who is a CPA to assist you in preparing and filing returns to make sure that you are in full compliance with the law while taking advantage of all benefits allowed under the tax code.
Frequently Asked Questions (FAQs)
What is a commodity tax?
A "commodity tax" is different from the taxes you will pay trading commodity futures. Futures trading incurs either capital gains taxes or ordinary income taxes. A commodity tax is a tax levied on a specific commodity, such as gas, to raise revenue for the government.
When do futures traders pay taxes?
Some traders may only have to pay taxes on their trading profits once per year. However, traders who anticipate earning significant amounts of profit may need to make quarterly estimated payments throughout the tax year. Individuals must make quarterly estimated tax payments if they would otherwise expect to owe at least $1,000 on their tax return.