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Using an LLC To Day Trade

How can you best use an LLC to day trade?  Recently a student asked me the following question:

I’ve been on your email list for quite some time and I really appreciate all your great info.  I have always worked in the corporate world, but now I am working on my own in my home office, trading the stock market, doing day trading.  I’ve just begun making money and my question is, should I form an LLC?  Thanks!

As with many aspects of LLCs or Limited Liability Companies, whether it is advisable to be using an LLC to day trade depends on the circumstances of your particular business. There are three aspects to the decision as to whether or not to use an LLC to day trade or use an LLC to trade stocks:

1.  Management in Using an LLC to Day Trade

The formation of the structure may make management of a project under control of the LLC easier than if it wasn’t in the LLC.  If there are a ton of people in the business, then the establishment of a legal entity will force the appointment of a select number of people to manage the business.  It doesn’t matter whether you use an LLC or corporation, the management issue has about the same outcome.  Obviously, the question of using an LLC to day trade is not an issue on the management front, because you’re the one doing the trading.

2. Tax Considerations in Using an LLC to Day Trade

A company has a different tax status than you do as an individual.  There are many things a company can do with taxes that an individual can’t do.  The company can lower your adjusted gross income.  There isn’t much you, as an individual, can do to affect your adjusted gross income directly, but everything your company does either raises or lowers your adjusted gross income.

Using an LLC to day trade will produce only passive income.  There isn’t a lot of equipment or other things that a company can “deduct” from the trading business that you can’t deduct as an individual.  You certainly wouldn’t want to use a C corporation to do your day trading, because the only way you could “recover” the money out of the C corporation would be through a wage or a dividend, and so that would mean higher taxes.  Therefore, if you use a corporation or an LLC to trade stock, you would want it to be a “pass-through” entity.  Using an S corporation, a partnership or a sole proprietorship to trade stock will accomplish the pass through  OR  you could use an LLC to trade and have the LLC taxed as a sole proprietorship (disregarded entity), partnership (if more than one person) or an S corporation.  I would probably use the LLC for day trading, if I used any entity.  The tax advantages won’t be huge, so if the cost or pain of having and maintaining an LLC is high, then forget about using an entity to trade.

3. Asset Protection in Using an LLC to Day Trade

Asset protection isn’t a big deal in using an LLC to day trade.  You could lose your ass—ets, but nobody is going to sue you.  The only exposure you have is the money you are trading.  So, there is no need to use an LLC to do day trading for asset protection purposes – at least not from the “company” liability standpoint.

Having said that, it could be a good idea to use an LLC to day trade, if your trading account is bigger.  An LLC has the unique ability to protect the assets of the company (the trading account) from your personal liabilities.  For example, if you get sick and have to declare personal bankruptcy, a properly established and maintained LLC would protect the trading account from that bankruptcy.  You could declare personal bankruptcy and not lose the trading account.  If you already have an LLC and operating agreement, you can use my operating agreement package, LLC Wizard, to beef up your current LLC. It’s cheap protection if the account is big. A corporation can’t protect the trading account from your personal liabilities.  There is no need to use a corporate legal structure to trade with.  Your structure, if you establish one, has to be an LLC.  BUT, you can have the LLC taxed any way you want.  The IRS doesn’t recognize a specific tax structure for LLCs, so you can choose how to tax it.  In the case of day trading, just have your LLC taxed as a sole proprietorship (assuming only one owner) and use your Social Security number for the tax ID in the company.

Good luck on the trades!

Lee Phillips, JD

13 Comments
  1. Would this be the same if you were a cryptocurrency trader? I’m trying to find the best way to turn my personal cryptocurrency trading into a business for tax benefits. I trade a lot and would consider myself a more than part time trader making multiple daily trades. It’d just be me trading and no one else would be investing.

    • Nathan,
      You would need to talk to a tax expert for your particular situation, but to be considered a professional trader you typically need to be spending more than 50% of your work time trading. If you have a day job and just trade a few times a week you may not be considered a professional.

  2. My brother and I have put some money together in his personal brokerage account and we are day trading options. However, I don’t believe we would qualify as professional traders because we both have other full time jobs. Would it still be worth forming an llc even though our trading would not technically be business activity? It’s starting to become a pain distributing cash and taking out a portion for my tax (because everything is reported on his 1099-B)

    • Jordan,
      The LLC wouldn’t do much for tax saving but can provide asset protection if you are worried about it. You would be trying to protect your stock investments from anything that could happen to you. If you are worried about personal liabilities too much then an LLC may not be worth it.

  3. Would it be possible to use an LLC to account for your trades on a LIFO basis, while maintaining a personal holdings as an individual, which are accounted for on a FIFO basis? If so, I think an LLC might be a great way to manage risk with cash reserves.

    • Mike,
      This is a tax accounting question, not an LLC question. Consult an accountant. Generally LIFO and FIFO methods are not used in stock trading transactions.

  4. If I form an LLC in Nevada but execute trades in another state will those gains be considered out of state gains thus taxable based on the state im living in? What if they are operated through a virtual private server or a server hosted in Nevada?

    Is there anyway to set up an LLC so that the trade gains are considered earned by the entity in Nevada despite being operated from a distance?

    • If you are trading stocks you will be taxed where you live. The only way you are going to get those trades taxed in Nevada is to set up a C-Corp in Nevada that will own the stocks but it will probably end up costing more in taxes.

  5. I have been trading cryptocurrency as a hobby for 2 years. Recently, I’ve moved to paper trading standard markets,commodities and forex. I have established profitability and would like to explore trading professionally. Should I form an LLC to do so? (I have a full time job that I plan to keep. However its a family business and allows me ample time to research and day trade…)

    • Steve,
      If your primary source of income not from trading then you would not be considered a professional trader and it may not be worth it to create an LLC. Trading is not a bit liability asset so you don’t need the asset protection as much.

    • If you are worried about liabilities from outside your trading then yes do the trading within an LLC. You probably aren’t to worried about the liabilities of the trading.

  6. Hi,

    I am kind of confused, so can I can start an LLC to trade, and therefore I can deduct trading expenses such as WIFI (the sole purpose for trading), cellphone (secured phone with great encryption), Cell phone bill ( phone only use for trading on the go)? This would be the main reason I want to start an LLC to deduct trading expenses.

    • Max,
      You can start an LLC to day trade and deduct your expenses, but just understand that deducting things that are used for both business and personal use is a gray area and that if you are audited it is not a guarantee that the IRS will disallow the deductions.

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