If you don’t qualify for trader tax status, don’t buy into an expensive “tax-avoidance” entity scheme, even if the salesmen call themselves trader tax experts. Such salesmen often say a business entity doesn’t need trader tax status and encourage “dual-entity” schemes comprising an LLC for trading and a C-corp for administration.

Without trader tax-status qualification, the LLC used for trading is considered an “investment company” and the dual-entity scheme doesn’t provide business and trader tax breaks. The LLC gets stuck with investment income and expense rules and the C-corp owner gets stuck with restricted capital losses. These dual-entity schemes are expensive, incorrect, and can cause traders lots of tax penalties.