Neal McSpadden on Low-Stress Options Trading Tax Strategy and Interest Tracing

I was doing day trading back [music] in 2003 and I ended up losing about $100,000. And so when I finally got my tax situation straightened out, I had this giant capital loss on my tax returns and I wasn't doing any trading. So I just had minus 3,000 every year. >> It's that you can only write off three. Like you'll get taxed on an infinite amount of income and then you get this tiny little sliver where it's almost like they're just pissing on you. I think taking that $50,000, going to Vegas, putting it on black, and then losing the $50,000 is a better use of money than sending it to the government. >> Hey everybody, what's going on? Welcome back to Remnant Finance podcast. We've got something a little bit different here today. We're joined by the team tax sherpa. We've got Neil Mcpadden, Serena Cooper, and Fatma Manguin. Can I you say

that correct? Did I say that correctly? >> Yes. All right, perfect. So, what we want to talk about is we’re going to discuss the low stress options trading that we and a lot of our clients and also Neil himself are are new members of and and practicing now. And so over the course of the last few months, a lot of our clients, Remnant Finance clients that are doing, you know, infinite banking or however they’ve found their way to Neil and the team at Tax Sherpa, a lot of us have been adding this new element to our to our asset strategy. And so there’s obviously a tax implication here. And so Neil reached out and wanted to set up a discussion so we can talk through what should we be thinking about. Now, everyone in our in our sphere that is doing the tax or sorry is doing the

options trading hasn’t had a tax return that reflects that yet unless guys have been doing their own thing on the side for a long time. But for most of us, it’s new to our current tax strategy. So, what do we want to look out for? How could we possibly think through ways we could prepare now and and set up for the rest of this year to kind of absorb some of that that tax? What can we do moving forward? And then also we’re going to take some questions from our group of clients who are considering this and thinking through this. So we want to have a general tax discussion. We want to have an option specific tax discussion and then we’ll just go from there. So without further ado, welcome to the tax sherpa team. >> Good to see you. >> Thank you. >> Yeah. All right.

It’s a thing that we keep getting. So, you know, obviously we talk to new people all the time and they say, you know, I’ve got this new thing I’m doing this year and you know, I’m doing this options training. I say, oh, you’re in lustrous options. Yeah, that’s and the next question obviously becomes, well, how much you make it, right? Because it does have a tax impact like you said. And then we have to start planning around that uh about around what people, you know, think they’re going to make, which is always a challenge as market conditions change like we’ve seen in the last few weeks. So, So everything’s always to be determined when it comes to, you know, the gains. >> Yeah. And I don’t know that those gains are as straightforward as we think. You know, those people who are doing it, what they provided was a pretty cool

tracker that shows what your gain is each week. So what your what your profit is. But you know the common thing you hear from folks that have been doing that kind of trading for a long time in including the guys who who run it is that you know everyone says of course like I can’t give tax advice but when we get our paperwork from Schwab or from Robin Hood or from wherever it is that they’re using for a brokerage that it tends to be lower than they anticipated. So it’s it’s which makes it even more muddied because we’re tracking one specific metric and the brokerage houses are tracking an entirely different metric. >> Yeah. Yeah. So I’ll give you the quick rundown on how these things do get taxed. So each each contract or each stock is a different thing, right? So you know when you sell to open an

option, you are collecting premium and let’s say everything goes great, right? You sell to open, you collect premium, it expires worthless, it goes to zero, right? So that p that whole amount is going to be short-term um capital gains which is going to be taxed at whatever your ordinary rate is depending on your total income for the year. But once you start doing other things, it gets more complicated, right? So in 99% of cases, it’s all going to be short-term regardless. But if you get assigned, so now you have a a stock which is going to have its own, you know, purchase price based on your exercise price of the of the option. And then it’s going to have either a capital gain or capital loss depending on, you know, how you how you trade it on from there. If you start to sell covered calls, you know, that’s a separate

contract, right? If you’re rolling options, you’re you’re closing one at a loss and then you’re opening a new one with a new premium, right? So, you know, what you put into the tracker, you know, may or may not have anything to do with all of those different transactions that that actually happened. Uh, and so, you know, there there’s a couple different, you know, degrees of freedom here where, you know, what the tracker is tracking is dependent on what you put in. And then, so you there might be some issues there. And then you know the tracker is kind of looking at your account on a on a holistic return on equity sort of position rather than tracking each individual taxable event chunk by chunk. But when you get the report from Schwab or whoever that you know it goes each individual trade one at a time and then

it it summarizes everything into the summary reports that you’ll see you know in the 1099 package. I I will caution you that if you’re an active trader, if you’re doing a lot of contracts, those those packages get thick. So, you know, they’re all PDS these days, but you know, in the old days, we used to get those delivered by mail. Some people still do and they get hefty. But there is a summary page and Schwab puts it in the back. So, if you’re on Schwab, you got to go to the end of the of the thing to get the summary of all the different pieces. >> Is there anything? So, I know there’s like you you could do real estate like I have a few rental properties, but I’m not a real estate professional. I don’t get that tax treatment. >> Right. In the same vein with trading,

I’m assuming active trader is a criteria different than just I have a portfolio and I make a few trades every month like what is the threshold there and do is that something that we want to get or is it something that we don’t want to get? That’s that treatment. >> Yeah, usually you do not want that. So there is a professional trader kind of designation that you can elect and basically it’s it applies when trading is your business and you know there’s a couple different criteria in that definition where you know you’re you’re you’re engaging in substantial trading activity every day. It occupies you know an amount of time you know each and not not necessarily every day but on a regular basis. And the the major difference between an active trader and a passive trader is that if you’re an active trader, you go mark tomarket. So instead

of looking at all the different trades throughout the year, you start January 1, my account is here. January or December 31, my account’s here. That’s the gain I’m going to be paying taxes on, even if I haven’t sold anything. Right? So, the vast majority of time that is not going to be what you want to do because you lose any potential long-term capital gains treatment which is preferential over short-term capital gains. And especially if you haven’t sold anything and you’re just sitting on uh your investments, then you’d have to sell something or get the cash from somewhere else in order to pay the tax on it. So, it can go against you in a hurry. But if you’re a market maker and that’s your job and that’s your business, then yes, that makes that makes sense to do. So um very very >> well the value of doing it

reason. >> Yeah. So the the value of doing it is that if that is your business then you can start to apply it basically converts it into ordinary income and then you can apply expenses against it. So if you have an office building where you do your trading and you advertise you know to bring people into your organization and that kind of stuff but that’s not going to apply to the vast majority of people. >> Okay. So that that we can kind of scratch off for our clients because they all have a primary occupation. They do some trading on the side, but we don’t really have to worry about don’t don’t opt into being a professional trader. Don’t try to get that status because it doesn’t apply anyways and there’s no it’s not like we want to show every hour of real estate we can if if possible to

get that status like this is a separate thing. So all right, check that off. We’re not going to pursue that. What about um I know so can you talk about offsetting capital losses and and I’m going to I’m I’m going to take a stab at it but if I recall $3,000 can be offset of loss and then beyond that it gets carried over to future years. Is that the same here or is that not >> the same? It is the same but people get confused on this a little bit where it’s a $3,000 net. So, let’s say you’re trading options and you have huge gains and you have $50,000 of gains, okay? And then you have losses against that. You can deduct in the current year up to 53,000 against that so that your net position ends up at minus 3,000. Okay? And then, so example one, you make 50,

you lose 53, you’re at minus 3,000 for the year, over and done. Version two would be, okay, you make 50, you lose a h 100red, you take 53 of those losses in this year, and the remaining $47,000 of losses will carry over into the future. Okay? And then the first $47,000 you make after that will be, you know, netted out against that loss or you continue to write it off at $3,000 a year. So, as an example, back in 2003, the reason I got into tax trouble and and got into the got into the business that I’m in was I was doing day trading back in back in 2003 and I ended up losing about $100,000. And so, when I finally got my tax situation straightened out, I had this giant capital loss on my tax returns and I wasn’t doing any trading. So, I just

had minus 3,000 every year for however long. I still have minus $3,000 a year, which will be offset a little bit this year because I have to dip my toes back into the into the options trading game. And so that just that just gets whittleled away every year at $3,000 a pop. But I’ve had people come in and and think that it’s like, oh, I made $50,000 in in options trading and I can only deduct 3,000, so I’m at 47. That is not true. Okay? you can’t it’s it’s it’s after everything’s said and done minus 3,000 is the most you can take in the current year and then the remainder rolls forward into into the next year. Wait, so you said you make 50, you have a three loss carryover, it’s not 47 is what you’re taxed on or did I did I mishar that? No, I’m saying if you make

50, positive 50, and you and you lose 100, then you have minus 3,000 this year, 47,000 is going to carry over to the next year. But you you could have plus 50 minus 25 and now you’re at just plus 25 and that’s fine. So the amount of loss is limited to the gain and an additional 3,000. And it’s so some like I was trying to say some people think it’s just the 3,000 but no it’s it’s the amount of gain plus 3,000 is the total loss you can take in the current year. So if you have if you’re doing this options trading and on the other hand maybe in a different account or or same account or whatever you have a portfolio that has some things you’ve been holding for a while that are in a in a loss position. you know, the strategy is called tax

loss harvesting where you harvest the losses that you have sitting there and that’s going to offset gains you have on the other side. >> So for for a lot of people who have moved the majority of what they keep market-based, you know, who are who are who are within the low stress trading platform and seemingly being very successful, right? That’s not going to be much of a play. Are they gonna It doesn’t seem like they’re going to show a lot of losses. Or will that be based on the accounting of how Schwab kicks it out versus what they believe they’re making on their weekly income. >> Well, there’s some of that for sure. But yeah, I mean, some people are going allin. We’re seeing that a lot, you know, cuz they start to it’s like, “Oh, I’m making 1.3% a week or whatever it is.” And so they just take whatever they

had, you know, as their dry dry powder and then just dump it all in and start trading that. So, you know, if you don’t have anything else, then yeah, you’re going to be whatever your net position is when December 31st rolls around in terms of taxable gains and taxable losses, that’s just going to be it. But, but the tax loss harvesting is useful if you have these other things. So, there’s a there’s a company out there called Fick, uh, FEC, and if you are wanting to buy the S&P 500 and indexes like that, they have a really interesting approach where instead of buying an ETF or or mutual fund of the S&P 500, they actually buy all the different stocks for you and they manage, you know, the the fractional shares and all that kind of stuff. And then as individual stocks drop in that they sell those at a loss

and replace them later so that they track the overall index but they’re constantly building up a tax loss harvesting position. So you know but it depends on your allocations right it depends on what you actually want to do in the market. So if you’re all in on the options trading all that stuff’s not going to help you because you don’t have that other stuff. [laughter] But for those people who have a more balanced I have my options you know active trading type account and then I have a passive long-term investment kind of account then you know that can become an option for you >> if you’re going back to rolling an option for instance >> you’re buying you’re buying to close the position that you initially opened. >> Yep. >> And you’re selling to open a new one further down the road. And if like hopefully these terms make sense if

you’re listening if not basically you know you have one transaction that you’re paying to close out a position and another one where you’re getting paid to open and ideally you’re getting paid more than you’re paying to close. So you have a net positive there. You almost always you pretty much exclusively make this this move when it gives you a net positive. So I have to buy a position for $10 that I open earlier. I buy that one back for myself at $10, but then I sell another one for $14 and now I make $4, you [clears throat] know, times 100. But just that $4 is the only number that matters in that one transaction, right? There’s nothing with the fact that I purchased a position and now I’m selling it at a loss is how it should work. You know, of course, I’m netting out positive with the with the overall

premium, but the part that I’m buying down, that doesn’t matter in in this one transactions equation, right? the only thing that matters is the net profit or loss when these two things are are weighed against each other. Is that is that >> well does that make sense? >> Well, you know at the end of the year that is true but on the tax basis those are two different things. So you know you you open the first option you bought it back for a loss so that you’re going to have a you’re going to have a short-term loss for that one contract. Then you have a new contract that you opened and hopefully closes positive, you know, closes for zero and that’s going to be a gain. And so at the end of the year, everything gets added up. All your all your positives, all your negatives get added up and you end up

with a final capital gain. And so it kind of depends on what question you’re asking. Are you asking like for for me as far as my account, I only really care is the number going up, right, over time? And in that case, I only care about the $4. But when it comes to the reporting side, each of those different things are different are different pieces of the puzzle that all get allocated separately. >> And this would matter a lot more if they didn’t have this. I would I’m gonna guess arbitrary and and and cynically. It’s just kind of a it’s that you can only write off three. Like you’ll get taxed on an infinite amount of income and then you get this tiny little sliver where it’s almost like they’re just pissing on you, you know, like you’re have a little bit back, you know? >> Yeah. And there are some states that

don’t even >> it’s that’s is there okay cynically I think that’s just because why not why would we not write this rule? Why not give them a breadcrumb? But there’s no like that’s that’s almost a negligible amount of money for for most people. Yeah. As far as you know, it’s not that you’re saving three like $3,000 is not a negligible amount of of money to a lot of people, but >> getting to write off $3,000 of income and offset your taxes, you know, your taxable income by 3,000. I mean, that’s a drop in the bucket for just about anyone. Like poverty level, that’s still a drop in the bucket. I would think it’s a couple hundred bucks maybe. But the so is there any backgrounding history or why that’s the case or is it just >> so there there’s kind of two elements. So one is it is very headsy win tails

you lose >> cuz cuz you’re right if you do have a gain you’re paying tax on the whole thing. If you have a loss eh tough luck right and like I said some states don’t allow losses at all and then you just you just pay on gains even if you had losses before. So, so there, so there is that element. And the other element though is that this was created back in the I want to say 1950s and it was never inflation adjusted. So I saw somebody making some commentary on on this particular number and said like well in 2025 that would be like the equivalent of taking like a 25 or $30,000 loss. So you know the fact that they haven’t inflation adjusted it is arbitrary because some things are and some things aren’t. It just depends on what the legislation says for the that guide to

that particular section. And so, you know, you could [laughter] you could make the argument that it, you know, maybe it’s an oversight that they didn’t think it would be that big a deal that the 3000 was never adjusted, but, you know, I’m I’m probably as cynical as you guys. So, >> that that that also overlaps with like another way that they do the same thing is is is for gambling. I know [clears throat] >> you can offset gambling losses but only by as much as you win. So if you lose $50,000 gambling and that’s all you do. >> Yeah, >> you don’t get to claim a loss. But if you >> if you win $50,000 and you also have tickets showing a loss of 50, you can write you can offset that. But it only works in one direction. And so theoretically, >> hypothetically, if you were to be a client and friend

listening that has placed a wager at a at a sports book in Las Vegas for me in the last couple months and that ticket loss and that was a hedge for a larger bet, theoretically that person could offset losses at all or no, only if they win, right? So if you have a $5,000 losing ticket, you can’t do anything with that. You can’t offset any gains. But if you go and win $5,000, then that $5,000 wouldn’t be taxed. Is that correct? In this hypothetical madeup scenario, in >> in this hypothetical madeup scenario, that is correct. Now, there is there is a wrinkle with this in that the One Big Beautiful Bill Act that was passed in July has limited the gambling losses even more. So, it’s it’s really it’s really disadvantageous to have gambling income even if you have gambling losses. On top of that, you know, it it kind of

it kind of runs gambling kind of runs in the same rule as hobbies. So, if you make a if you make money in a hobby, you pay taxes on the gains, you know, assuming that you’re worth them accurately, but you do not get to deduct losses because it’s a hobby. So, hobbies cost money, right? So, same kind of thing with gambling. So, if you make money, you pay taxes. And if you lose money, that’s just money that you spent because you’re a hobby of gambling effectively. So yeah, it’s the the the thing about the tax code is that it’s a it’s a series of carrots and sticks, right? And so they pass laws to create advantages for certain things that they want you to do and they have to other taxes that are disadvantages for things they don’t want you to do. So gambling is very much one of those things they

don’t particularly want to encourage. >> Yeah. >> So >> that’s unfortunate. So, what I’m what I’m getting from this to go back to the the people who are doing options trading >> is at the end of the year, it’s basically going to show what their net gain was, which is what they’re probably tracking >> hopefully. >> Yeah. >> Now, I you can also go into most brokerage accounts and you can run a capital gains report, you know, before the end of the year and we should give you a number as far as what you’re currently looking at. But I would I I think that the reason that most of us or most people say that they’re pleasantly surprised by less taxable income when they get their statement from Schwab or their brokerage is because going back to the beginning at what we talked about the way that the tracker would track for

instance your cost basis. If you get assigned on a, you know, if you have a $20 stock and it gets assigned, it counts that as $2,000 towards your total balance even as the stock drops down. So, if the stock is $15, Schwab is going to show that that’s $1,500 of equities and your tracker is going to show $2,000. And so, if the numbers of your profit and everything is based off a different total value of your account, then it will obviously will reflect differently in the tracker than it will at Schwab. So, really, for tax purposes, we only need to be looking at what Schwab or a brokerage is saying. No, there’s no point in looking at your weekly income, your total income or anything from the tracker. I don’t think unless you know maybe maybe the the team at low stress options could explain if

that is not the case. But right now, just focus on what your broker says for your total taxable gain at the end of the year. That’s that’s pretty accurate, right? And it’s all short-term capital gains. So, it’s all going to be based on your income. Yep. So, that gets into the next discussion that a lot of people want to know about is like, “All right, well, let’s just assume I’m going to have a a large short-term capital gain from this because it’s going to be part of my overall tax strategy. There are other things I can do to offset that.” Like, the way that I view my rental properties right now is the cash flow is is is nothing. It’s a mere trickle compared to what I I hope to do and am currently doing in the trading account, right? So if I were only doing it for the cash

flow and the rental properties, I would I would sell the properties, but having those properties is such a big tax sponge is the way that I think of it now. So >> what things can people do now to set up or what other assets serve as tax sponge or ways that we within the within the overall like end of the year, here’s your one number refund you’re going to get or amount you’re going to pay. All these input factors go in. What are some things that stand out to offset hopefully large capital gains? >> Yeah. So, it’s a hard question to answer simply because everybody’s situation is different. So, yeah, if you have real estate, then you can get into the discussion of like, well, I’ve got depreciation on the property that I’ve already bought and that’s going to create a phantom taxable loss. How much

of that loss is usable is going to depend on what my total income is for the year and whether you know we’re actively participating as a as a real estate professional or you know a lot of people have one spouse working and one spouse managing the real estate to build up enough hours to to justify all that. So effectively, you know, there there’s a myriad strategies, but fundamentally what you’re looking for is to create deductions against income. And that could be that could be business losses, that could be depreciation type of losses, that could be charitable losses, you know, depending on the numbers involved. So, you know, this is what we talk with our clients about is like, well, what’s your situation? Okay, we have these 17 pieces. Okay, let’s figure out what we can do to to make your particular situation as as good as you

can. Now, I will say for your clients in particular, you know, there is if you’re taking policy loans for funding your trading accounts, then there is a concept in tax called interest tracing. So, if I’m paying 6% on a policy loan, then that is going to count not just as general interest, but it’s going to count as investment interest, which goes into your schedule A of itemized deductions. So, uh that is something to keep in mind. You have you have to pay it though. You can’t let your balance acrew up and and never pay the policy loan because, you know, policy loans are flexible in that way that most other loans are not. >> How does somebody track that? like how does somebody show that and what the function of that loan was especially when you consider that like you know from from one policy as you know Neil if

I take multiple loans for multiple things it just shows one document so how do I how do I do that in a taxable way how do I report that document that >> what you would want to do is you would want to create I mean I hate to say create a spreadsheet but it’s basically what you’d have to allocate >> yeah you’d have to allocate however much what percentage of the total is applied to, you know, the the the investments and then figure out how much of the interest that you paid back to the to the insurance policy, how much of that was allocated to the investment activity. And so basically the the way it works on a tax return is the on the interest portion you have on your schedule A you have mortgage interest and then there’s going to be a box below that of the investment interest paid.

And so if you’re in the itemized territory, which for a long time we we didn’t do any itemized because in 2017 the standard deduction doubled and nobody was paying any mortgage interest because rates were so low, but now that’s changing. So people are getting $50,000 interest paid statements from their mortgages and so they’re getting kicked into itemized deductions once again. So if if you’re in if you’re in the territory where you are potentially itemizing, then you can get an extra deduction from that interest, but you got to do the allocations. You got to be able to trace out, okay, this chunk of money went into the investment account and therefore this percentage of the interest I paid is allocated to that and is deductible. So, so it might be wise for people that have a system of policies then to use one policy if they want to allocate some

of those funds and just use that particular policy for this >> for investment purposes if they can. >> Yeah, if possible that’s that’s simpler. >> There’s a lot of strategies that you could use obviously to tie infinite banking into the trading or any other investment for that matter. And that is that true for all investments now that we can itemize that. Yeah. >> So, if I use it to purchase real estate, same thing. >> So, okay. So, like one of my things with the trading, one of my thoughts is let’s just use $10,000 for easy math at 5%. If I wanted to take a policy loan of $10,000, put it into my brokerage account to trade with. the the best bet might be to just at the end of the year or the end of the policy year withdraw from my brokerage account pay the $500

in interest >> once a year >> until I’ve satisfied a point where I want to start paying that loan back. So then it’s just one full transaction every year. Would that simple? Is that And then you’re saying I could take that 500 bucks and write it off on an itemized >> schedule a you said. >> Yes. Because in the low stress options world you’re settling to cash anyways. Then yeah, you can you can take the money out of the trading account without because you’ve already sold everything hopefully and then you can pay back the interest and then refund the account and just start all over again. So yeah, that works. And so for clients, what you need to do is go to your you on yet your loan balance if you have multiple loans that you’ve taken for multiple different purposes. It’s just going to show one

number and one interest acred at the end of the year. But you can look at your transaction history. And so I could go back and and and Brian said 10,000. That’s what I borrowed from my policy against my policy to put into Schwab. So I I could go in and say here on this date, October, whatever, I took a $10,000 policy loan, and the next day you can see I deposited 10,000 into my Schwab account. So that kind of tracking I it would behoove you to to keep all of those notes so that when they work with you or with their tax repairer that they’re ready to go. But this is a good point to to emphasize that you should not be doing this by yourself. like no, >> you should not just be doing your, you know, what what what I did for for 10

years, you know, get my discount on Turbo Tax as military officer and try to try to do this myself. You should absolutely not be doing this. You need to talk you need to either reach out to us. Uh we’ll put you guys your your scheduling or booking link in the show notes, but you need a team that does this for you professionally because there’s so much you’re going to miss if if you try to just go at go at this yourself. So, so please do not >> do not try to figure this out on your own. Have a sherpa to get you up to tax mountain here. So, >> about the uh mortgage interest deduction, was there changes in the big beautiful bill for that? I know that was one of the things that was back and forth and you were sending out updates to your clients about

they’re considering this, here’s how it could happen. Okay, if they’ve done this, here’s what changes, etc. What was what’s the the takeaway on the mortgage interest deduction? Yeah, after a whole lot of after a whole lot of back and forth, they just kind of end ended up locking in what they had already done with the 2017 reform, which is for mortgage balances under $750,000, you can deduct the interest. It’s kind of it. So, depending on the the the loan in the house, you know, obviously real estate prices are rising and rising. So, I think the average right now is about 450,000 for a purchase in in 2025. And so that’s that’s middle of the road. If you’re in a high dollar market, you might be spending 1.2 million, right? So you’re only going to get a deduction on the on the balance amount that is under

$750,000. Uh so a lot of people are confused by this and they say, “Well, I paid 50 grand of interest. Why don’t I get $50,000?” Well, because 23 of that was above the 750 and you just have to you have to prorrate that. Uh but but yeah, effectively the the would be beautiful bill just took the tax cut and jobs act and said okay this is the way we’re doing it from now on and as all things Congress from now on means until we pass a new thing. So we get we get a big tax bill about once a decade. So figure 20 30 something we’ll get a change on that. >> I have two questions and then we can jump into some of the the client questions. Draw down strategy. you get to the point, you know, you’ve got you tracking your weekly income that this is

generating for you. You get to the point where you actually want to start using this. Is there any thing to think about any ways to optimize when you’re actually going to take deductions? You know, this might get back to tax loss harvesting or something. Do you do you sell a certain type of position? you know, maybe a position that’s at a loss or something in order to capture some tax benefits there or as the money as the options expire, as money just goes into the account, do you just do a a simple online transfer withdraw money because there’s really no way to optimize there? Is there anything to think about when we’re we’re doing draw down here? >> Yeah. So, if you’re purely doing just options trading and everything is going back to cash every week or two weeks, then yeah, just take the money out and

that’s it. But if you have longerterm holds, then you do want to preferentially sell the things that either have long-term gains because the rates are about half of short-term gains or the ones that have losses that can help offset these other things. >> Uh, one more question. This is kind of an ongoing debate, not a debate, but just back and forth. Some guys in our group have set up custodial accounts for their kids. I took the route of just opening up another Schwab brokerage within my platform. It’s my account. I just named it my daughter’s names and I’m trading, you know, I I use a policy loan from their policies. I’m going to trade for them for for for years, forever as long as I’m alive and just keep growing that money for them. And that could be >> that could be a college fund, car fund,

that’s, you know, if they rental property, whatever they, you know, or just expenses, you know, gymnastics lessons, whatever. But like that’s an account that I’m going to trade earmarked for them, but it’s still under my control. Other guys went the custodial route where they opened up a custodial account where they have the power to trade it. But then that adds some implications of the money has to be according to Grock apparently. You know, one of the guys was kind of going down the rabbit hole of like how could I mess this up and you know that you need to trace the transactions from the kids bank account to the custodial brokerage account. So their value in a Roth IRA is very clear there because you know if you have a custodial Roth for the kids then you’re pretty much just removing all the tax consequences. it was worth the

workound of having to put the trans, you know, trace the money into the account, do it, do it the right way cuz then once you’re in there, it’s off to the races and it’s, you know, got to wait 60 years for them, but >> it’s taxree. But for just a brokerage account that I’m going to be that that they’ll be accessing, drawing from, we’re not trying to do the, you know, the IRA side of things on this. Is there any value to a custodial account? Cuz my thought was, I’m paying taxes on this every year. Whether it’s them or me, I can get what is it? $3,000 or $3,400 of kitty tax. So, I can shield basically like I might save myself. The way we worked out the math was about $500 a kid at an assumed 24% tax rate. >> Yeah. >> Is it worth the headache of this?

There’s no cost basis consideration down the road because I’m I’m I’m paying taxes and resetting that every single year. So, it’s not like we’re talking 20 years of investing and then transferring cost basis. Right. Right. Right. Any thoughts on on that? >> Yeah, you you are you are basically right. So kitty taxes are when you have kids that have investment assets and they generate income and so you get the first couple grand, you know, or I should say kitty taxes kick in once you get above the first couple grand of investment income. And so there’s if we’re talking, you know, significant amounts of income, there’s not a huge amount of difference between, you know, filing or between having custodial account and having it in the parents name because of the kitty tax issue cuz cuz that is a a loophole that has been, you know, cut off through the through

the kitty tax system. It does get more complicated if you are also like if you also have kids that are working in your business and you know you’re paying them a payroll and it can it can continue to get more complicated depending on the amounts of those things and how that interacts with standard deduction. And I had a new wrinkle thrown at me last year. I was in a class talking about getting financing for colleges and the uh custodial accounts will count against the student if they’re applying for financial aid. Uh whereas if it’s held in the parents name then it’s considered the parent assets and so it’s just a random thing that you could run into if if and when that becomes an issue. Now I know fewer and fewer people are sending their kids to college. So that might be not [laughter] maybe that doesn’t matter

but you know for those of people who are going through that process that that can be a wrinkle a very unexpected wrinkle if you do set up those custodial accounts but yeah bottom line there’s not much tax benefit to doing that way and there can be a couple downsides if you you know don’t do that tracking accurately and things like that. So for me >> there’s also restriction on usage too right like you could you it’s not like you could go buy them a car with that money. I mean, you could you just close you just close the account, >> but but yeah, you’re you’re you’re creating in my opinion, you’re creating more complexity for no benefit. >> Okay, cool. >> All right, I’ll just run through some of these questions here cuz cuz the guys, you know, obviously this is front of mind for everyone. So, I’m wondering

about real estate LLC being used to write off capital gains, if that’s even possible. kind of we kind of addressed that um and situation specific but anything else on on using a real estate not just having properties but a real estate LLC. Is there any distinction there? >> Yeah, I mean the distinction is if you have an operating company like it doesn’t have to be real estate just any operating company. So that’s generating a a taxable loss for whatever reason then that’s going to lower your overall income. And so that could affect what rate you’re paying all no short capital short-term capital gains depending on the numbers involved. it might eliminate, you know, the entire thing. So, again, the the difficult part is like everything depends on the exact specifics of what’s going on. So, but but by and large, if you have a a company that you own that’s throwing off

taxable losses, then that’s going to lower your overall tax regardless of any other factors. >> Okay. So, it’s not that it’s real estate LLC, just an LLC, >> just just some operating company. >> Okay, cool. Is there a difference between taxes on selling option versus taxes from profits of selling a stock or is it taxed the same as selling a stock under one year? >> So as long as they are not index options, it’s the same. So if and I don’t think anybody in Lost Options is trading index options. So there are there are indices like the NDX and the S&P which is different than the QQQ and the SPY. So there are ETFs out there that represent indexes. There are mutual funds out there that represent indexes and then there’s the index themselves. The index themselves do have options trading and if you trade those then you

get a 6040 split on long-term short-term capital gains but again I don’t think anybody in low stress options is doing that but it is out there. So I fun fact my mentor who used to work on Wall Street was actually involved in creating that 6040 tax treatment for index options. Now, just just because I might have this might have gone right over my head when you say index options with like Q, you know, QQQ or something that’s a that’s tracking an index fund. >> No, not a fun >> an option on an index fund. Is that what you’re talking about? >> No. No. So, that’s just a regular option. >> Okay. >> So, if you trade a QQQ option, that’s just a regular option. But if you go to the NDX, which is the NASDAQ index, there are options on that, right? And so if you trade those options, then you get

60/40 treatment between long-term, short-term. >> So spy, like spy would be the same thing. >> Not spy, SPX. So two different things >> or SPX. Yeah. Sorry. Yeah. >> Yeah. >> Okay. All right. Gotcha. Um Okay. So we have two that are on the professional trader. And I think I think the takeaway was that none of us should be are going to qualify and none of us should try to. But when would it make sense to create our own stock trading business for the tax shelter? I think this is what Troy does so he doesn’t have to pay as many taxes at the end of the year. Once my balance is around 500k, it may make sense to set up something like that, then also pay my kids like he does. It’s at what point is the juice worth the squeeze to start a stock trading

business for the tax shelter? >> Yeah. I mean, >> half a million is probably in there because again, so so like Troy is running an active business, right? There’s low stress options. They’re doing advertising. they have all these different expenses that would not be deductible to an asset trader, right? But because this is part of the business, then okay, now it makes sense to have an active status where you’re looking at the overall growth in equity and then deducting against that all of your other expenses. So, you know, I would I would say in that half million range that starts to starts to make sense, but but again, you know, you you need the expenses to have, >> right? So you you can you can accomplish a similar kind of effect if you just have the passive income from the from the options trading and then you have

active operational losses from a different business. >> So it’s not necessarily that it has to be tied together. >> Okay. All right. This is one of your one of your new clients. This is Hank. So he’s got his LLC set up. Orientation will be real estate management, trading consulting/education, and trying to work some agriculture in. Neil briefly discussed registering as a professional trader to help shelter some of those earnings, but would need to be early in a tax year. So, 2026 at this at the earliest. >> Didn’t discuss a specific account size threshold for it to make sense. >> Want to revisit that. So, again, that’s almost the same question, but my my question on that would be, >> do you want an LLC that’s doing all of these disparate things? Should you have an LLC for each of these ventures or does it not matter?

Yeah. >> And then I guess back to the professional trader question. >> Yeah. So, so the the election thing, it has to be done early in the year. I think it’s >> I think it’s 75 days. I’d have to check on that, but it it can’t be done in November for the year, right? It’s got to be early on in the year. And then the other question on a tax basis, it doesn’t really make a difference if it’s each one individually or they’re all in one. There there is and this is a question for the lawyers there is an issue if there’s a liability exposure in those different things do you want to have those assets in the same place because let’s let’s say like in real estate for example this happens all the time I’ve got three properties do I put them all in one LLC or do I put three

three different LLC’s like well depends on how paranoid you are right so somebody slips and falls outside of property A they’re going to sue the owner of property A which is some LLC if they win and there’s other assets in that LLC, then those are exposed for that particular lawsuit. And you know, maybe you have insurance, maybe you don’t, you know, obviously it depends on what actually happens in that lawsuit particulars. But if they’re in separate LLC’s and you can keep them separated, you’re not comingling funds or or anything like that, then you know those other assets are more protected from that liability exposure. So, so if you’re doing three different things, you could do them all in one LLC, but it may not be a great idea just from that liability exposure perspective. If you don’t have your properties in an LLC, is having a large umbrella policy

sufficient in that to you know, encountering that that threat or do you do you want to no matter what get the LLC set up? >> You know, again, that’s a legal question. So sufficient is I don’t know depends on what happens right. >> So I will tell you that all of >> if you have much more than the properties are worth for instance let’s say you have >> I I will tell you that all my lawyer clients that have real estate they all put them in an individual LLC. >> That’s good enough. >> Put each property into its own. >> Yeah. >> Yeah. >> All right. That’s good takeaway everybody. Uh everybody write that one down. >> That’s a down [laughter] schedule a call with Neil. Okay. Cool. We got a couple more. Brian, you got anything else before I run through these? Any other comments or stuff?

I had something a long time ago, but I’ll wait till the end. >> All right. All right. Troy talks about crypto taxes being complex. Why? He says he likes to trade crypto-reated options versus get into crypto because of this. >> I mean, it depends on what you’re doing. So, the the problem with crypto taxes, and I actually wrote some articles on this a long time ago. So in 2013, the Irish stuck a flag in the sand and said, “We’re treating cryptocurrency or virtual currency as they called it back then as property. So it’s the same as a cup, right? So if I buy and sell a cup, it’s a gain or loss just like anything else, right? So that part’s fine. So if you’re treating cryptocurrency like a stock where you’re just buying and selling, it’s all the same stuff. It’s short-term capital gains, long-term

capital gains, all that’s fine. Um the difficulty comes in is when you start to do things outside of just buying and selling. So for example in in DeFi in decentralized finance there are uh there are contracts right that there are smart contracts that you can interact with. Now the way the IRS has issued guidance over the years is they say each token is a unique thing and it’s and if you exchange one token for another it’s going to be a taxable event either positive or negative. Right? And that’s not even getting into NFTs, which is a whole separate thing. So, so let’s say I have Ethereum coins, right? And I take those Ethereum coins and I and I send them to a smart contract and in return I get a new token that represents the position inside of that smart contract. So, you know, I’ve talked with lawyers

about this and we’ve kind of walked through the the mechanics of this cuz what happens is you had an Ethereum token which was worth I don’t know right now it’s actually I haven’t looked lately. Let me kill you. Right, that’s about $3,000. So, I have one Ethereum token worth $3,000. I I exchanged that. So, that’s a taxable event according to the IRS. And in return, I got this contract representation token which is worth nothing. Okay? I cannot sell it. There is no marketplace. So, on the IRS’s logic, that became I I took a $3,000 asset and I sold for zero. Now, that creates a capital loss. On the flip side, if I then take that that that contract token and exchange it and get my Ethereum back, now I exchange something worth zero and got back something worth $3,000. That’s a 100% gain. Okay. So, and that’s just that’s

just one example, right? The the problem is is that there is no legislation regarding cryptocurrency and taxes and the the things that have evolved in the cryptocurrency world with things like smart contracts just don’t have an analogy in regular property. Like I can’t do that with a cup, right? So that gets compounded by the fact that okay all this guidance was issued back in 2013 and they had a couple updates over the years and now we had the Reundo case with the Supreme Court and and that that Supreme Court decision tells us that in if there is no legislation then an administrative agency’s interpretation is not binding right so and this has wide reaching effects including things on things like IRS guidance So the the fact that they decided it was property back in 2013 is kind of like well that’s your opinion. There is no case law. There is no there

is no legislation. So we’ll see until until they actually rectify that. So there there have been a couple cases over the years that really haven’t gotten to a good resolution with like things like staking rewards. So, if I stake a if I stake a token into a contract and that contract pays me over time, then is that income? And the IRS says yes. Other people have said no. Um, one one argument that was made is that it’s not income until you sell that thing that you received. So, and the analogy that they used was baking a cake, right? So, if you’re a bakery, you have flour, you have sugar, you have yeast, you, you know, whatever. You don’t get taxed on the individual components. you get taxed when you combine the thing into the cake and then sell it, right? So, the fact that you combine it into a cake doesn’t count

until the sale happens because it’s it’s just really really ambiguous at this point, you know? It I think Troy’s point about trading options is possibly a fair one, [laughter] you know. So, >> if and it kind of depends on on what your what your motivations are, right? So most of the most of the OG Bitcoin people are are buying and holding Bitcoin because it’s a short against the fiat system globally and the US dollar in in particular. And so if that’s your point then I would say yeah just buy the Bitcoin and sit on it. If the point is just I want to make money then trading options on it can make a lot of sense. Okay, so endlessly complex and mostly ambiguous is taxation of crypto and crypto derivatives >> simple short-term capital gains on something like a put on IBIT. >> Yeah. >> Is is if you just want the dollars. All

right, that’s a good that’s a good summary. All right, I got one more. Buying and selling the same stock within 30 days invokes a wash sale rule where it disallows loss carryover for taxes. Does being put a stock invoke this since you didn’t buy it? No. Or I guess collecting a premium selling a put I’m guessing is what he’s trying to say. Selling a put you didn’t buy it yet. And so I think about >> I think that means that you’re signed. >> Yeah. So So the sign from the put is not the same issue as the put itself. Right. So >> buying and selling a put, buying and selling a piece of stock that that put is on two different two different securities do does not invoke the watch sale rule. >> However, if you’re buying if you’re if you’re writing puts on the same stock

over and over again and then you get assigned in between there sometimes then the stock itself you’ve owned and sold and bought and sold and bought and sold and so you might have a wash sale rule inside of there even though it was on two separate put contracts. >> Okay? So you could sell a put, get assigned, two days later the stock shoots up and you sell it for a profit. That’s not a wash rule. That’s just you you have taxable income on the gain. Correct. Or conversely, the stock stays down. You sell it at a loss. That’s not a wash rule because it’s a one-time thing where you got assigned and then sold. Yes. Is that is that accurate? >> Okay, cool. All right. Well, I think that’s all the questions we’ve got. Um Brian, you got Who did you have? I want to share my screen real quick. All

right, so this was the very first month of trading. I started off with about $14,000. You can see I down here at the bottom added 2383 through the month. These are my deposits. >> Okay. >> Now, if I look at what I tracked as far as options income, it was $1,378. >> Okay. Schwab, they’re saying that I have a realized an unrealized gain of 428 right now. >> Yeah. >> So, you have open 1378. It doesn’t show that on here. That’s just what I tracked from the options income, >> right? And every one of these, you know, for the last few months, I I I pulled up three of them, and we don’t need to see them all, but they show a very small gain or a loss in comparison with the options premium that I collected. >> Yep. >> So, is my tax basis more or less going

to be, this is just for the anybody that’s watching this and wants to look, >> you can go right into the tax documents section of Schwab. Is it going to be based on the summation of 12 months of whatever shows here >> even though that does say unrealized which I you know I realize that’s unrealized. >> Yeah. >> But >> well you see how that cost basis is negative. >> Yes. So that’s premium you received. And so >> okay, >> you know, when all when that all settles out, you know, that’s going to turn into basically negative 429 plus the 428 is going to end up with a taxable gain of, you know, the the difference there >> taxable. >> Yeah. Well, and could that be because you know through the end of the month some of these positions were rolled and that money was >> tied up, we’ll call it.

Yeah. accounted for. I was securing some securing the positions I’m in. >> Yeah. Yeah. So, you know, these these monthly summary ones like if you look up here at the gain or loss summary, you see gain 687, loss 93, unrealized 428.96. That’s, you know, when those settle out, that’s probably going to be, you know, it’s going to it’s going to be close to your gain hopefully >> of of 1300 of what he’s seeing in the tracker. You mean? >> No. No. the tracker has nothing to do with it cuz uh >> okay >> you know it’s just it’s just the you know the change in market value is I don’t know what you know maybe you you’re carrying stock from before and maybe it’s you know from things you got assigned you know who knows right so the like I said the best way to do it is not

on the monthly statements but is on you know you can run a capital gains report for the year like year to date >> I didn’t see that I looked but okay >> yeah yeah I don’t use schwah personally so I’m Not sure about what their reporting is, but most most brokers have something like that. And they can just they can just sum up the the historical trades throughout the year. And then they’ll you have whatever you have open, which is unrealized profit or loss. And then you can you can figure out what you’re actually looking at from a tax perspective. I’m just looking in my account here to see if I can find anything. I haven’t done a whole lot of trading, but let’s see. So, right now, we’re just going to have to rely I mean, I think it’s going to be good it’s going

to be a good case study come this this upcoming tax year when a bunch of us have tax returns that reflect this and we can actually get a year-end statement. >> Hopefully, we’ll be able to find or you will be able to recognize patterns and see consistency and be like, “Okay, I see what they’re doing here. Here’s why you’re getting these numbers that you are.” Monthto month, it might be kind of confusing and it might it might be hard to really tell until the end of the year. you could get a ballpark idea, but I don’t I don’t feel like I know any more about how they’re actually calculating this. But at the end of the day, it doesn’t really matter because they’re going to we’re going to use that number. And I think that just not just don’t be looking at your your blow stress options tracker when you’re

trying to figure out the you know what you’re going to be paying taxes on. Just rely on your brokerage statement. There we go. That’s as close as you can get for now. >> So, this shows a lot more. >> Yeah. So total proceeds, total cost basis, gain loss. So this is showing you have a net loss for the year. >> Yeah. And it makes sense because this, you know, these last few weeks to months have been just rolling forward as the stock market’s gone down. So that’s showing those as currently unrealized losses. >> Y >> which will turn into losses December 31st if it remains that way. >> Yeah. >> Okay. Which is kind of cool. >> Yeah. So >> that’s good. So good. >> Yeah. Yeah. >> As long as you’re not trying to draw down. And that’s the distinction that you know when you’re when you’re in like

I’m tracking this, I’m building up my capital. I want to see where I’m going to be at in 5 years kind of thing. That’s where I’m going to use the the calculator on the list options website. But when I’m in draw down mode, I don’t want to use those numbers because I need to look at what’s actually there. And so as long as as long as we’re in this kind of like rolling and continuous growth thing, we actually want to see that net loss there. and rolling out into the future is going to show on paper that unrealized loss which helps our tax situation. That’s probably why most people are seeing better results in taxes than they’re expecting to. That’s what that but that is that is actually cool to see. I haven’t seen that specific graph on the Schwab site before. >> Yeah. So it’s it’s somewhat analogous to

the difference between cash accounting and acrual accounting. So if you have a business, you have two choices. You can do acrruel or you can do cash. Cash means when I get the money, when I spend the money, that’s when I count the thing. Acrual means I’m taking into account like if I sign a contract and I am owed, you know, by this customer $10,000 over the next year, I’ve got to book that now, right? So, you know, in the in the low stress options tracker, my my guess is that they’re kind of looking on that long-term acrual basis, saying what’s happening overall with my mental position of I put in $5,000 or I put in $10,000, whatever the number is, as opposed to, you know, on the on the actual tracking that gets reported on taxes, it’s the cash in, cash out, and what’s happening at each individual

transaction. So they’re just answering different questions basically. >> Yeah. Okay. Well, cool. For anyone who’s again, this should be this should be on the top of your to-do list to get actual tax strategy put in place by someone other than you. And so if someone wants to reach out to you guys, what’s the what can you give us your little pitch about what your process is? If someone wants to reach out and they’re doing whether they’re just W2, maybe they have an LLC, maybe they have a rental property, they’re doing options, whatever. What does it look like to do an exploratory call with you and how does that process work? >> Yeah, I mean the process is fairly straightforward. You go go to taxsh.com. There’s a link on the top, book an appointment and then you’ll get on our calendar. And so the first step is

figuring out where you are. So we call that the survey and it’s going to we’re going to talk about your family situation, your your work situation, if you own businesses, if you have investments, if you’re doing trading or you have real estate, whatever the case is, right? We talked to a woman this past week. She’s got, I think, six different businesses she’s running at the same time, which is crazy, >> but she’s and they’re all pretty much making money, which is surprising, but so, so, you know, we have to map all that out. And then we take a step back and we look at the whole picture and we’ll say, okay, here’s what we’re at right now. here’s what you’re looking at tax-wise and here’s the things we think we can put into place as far as getting to a path towards saving as much as we

possibly can given your particular facts and your your particular circumstances. And so, you know, and then we’ll we’ll have those discussions. It’s like, okay, well, here’s here’s what we think we can do with A, B, and C, and if we do this, it’s going to change your destination to this better mountain over here. So, I was just working on on a client’s client’s tax return like an hour before we got on. And in their case, they had some equipment that they bought and how we treated the equipment affected how the tax return came out, whether it was money owed or break even or a refund. And so, you know, we can make those decisions once we figure out what actually is going on. So the the biggest problem the biggest mistake people make is they wait till March or whatever whatever it is that they file and they

say okay here’s all my stuff. It’s like well okay now it’s too late because we can’t make these adjustments throughout the year because we’re already at after the end of the year. So whether you go with with tax sherper or you or hopefully not on your own, but you know, wherever you go, do your do your planning now, especially as we get into the year end. And you know, nobody works in December anyway. So, you know, now is the time. Um, and you know, run those reports like Brian just showed and see what you’re actually looking at from a tax basis as far as your trading goes and all the other things that you have going on in your life, whether it be day jobs or real estate or or what have you. So it it takes work and the biggest people biggest problem people have is

just sticking your head in the sand hoping it works out at the end and you know maybe it does maybe it doesn’t but if you do the work ahead of time then you’ll actually know what’s going to happen. >> And if you if you give Neil and Tax Sherpa a call you’ll get to work with his lovely assistants Serena and Fatma. I don’t know if you guys didn’t say much but >> how do you guys talk too much? So I step in just to make sure that all clients are taken care of. So you will speak to me for your discovery call and also the route call. And then you always have Fatma, too. She’s our assistant. She’s actually both of our assistants. I stole Fatma from Neil. >> She did. [laughter] She stole her. >> Other than that, we’re here just to make sure that you’re proactive planning with

your taxes and not just, you know, coming to a service once a year. It’s all about being proactive and we’re here to help. So I I will tell your audience the same thing that I tell a lot of people is that for me and you know some people have different opinions about this but for me let’s say let’s say your tax bill for the year is $50,000 right I would I think taking that $50,000 going to Vegas putting it on black and then losing the $50,000 is a better use of money than sending it to the government. So true. You’re still you’re still out the 50 grand either way, but at least one is with private enterprise through voluntary transactions and the other is taxes. So that’s that’s that’s my approach to the world. >> I love Yeah. Yeah. That’s great. We have we have two previous episodes with Neil

where you can go back and kind of hear his background, how he got into this, and a lot more discussion about taxes. But and I’ll just say that one of our clients who’s going through underwriting right now about to put some IBC policies in place, set up a call with you guys and has been doing his own taxes. If you think that you are, you I just I work W2. I don’t have all these other fancy things going on. So, I can just do my Turbo Tax or whatever service you’re using. He’s an airline pilot, one rental property, and that’s and that’s about it right now that that that’s going on. and it’s looking like they’re going to get a a tax return of $30,000 and they’re used to filing it themselves and maybe getting a small return, but that’s because you guys put in place a lot of

different strategies beyond just what you’re going to find when you when you plug and play and put the numbers in yourself. For myself, you guys went back two years and looked at my previous returns and said, “Hey, not only did you jack this one up, dummy, but you also missed all these things last.” Now, of course, >> the uh the Treasury took those returns from the IRS due to my my my debt from the mandate stuff. So, I never actually got those returns, but they were filed. And um so, yeah, don’t think that you can’t use solid tax strategist based on your situation. It is at a minimum worth your time to set up an exploration call and and and see how it might help you. So, >> absolutely. >> That’s all I got. Anybody anything else, Brian? Neil? Nope. >> Serena Fatma. >> Nope. >> Not good.

All right. Cool. Well, thanks for tuning in everybody and we’ll catch you next week. Cheers. >> Have a good >> Have a good day. >> All right. See [music] you all. Thanks for listening to Remnant Finance. If you found any value at all in this episode, please subscribe, [music] leave a review, and share it with a friend. Remember, true financial freedom comes from taking control of your personal economy and breaking free from the status quo. So, stop being a passenger in [music] your family’s financial future. boldly take back control of your wealth. Until next time, this is Brian and Hans signing off.