Taxes are a subject that every single watch trader wonders about when they start their journey. It quickly goes from wonder to worry once they start making good money at trading.
At Watch Trading Academy, we wanted to put together a guide explaining best practices for taxes so that as you progress you can refer to this article, handle your taxes accordingly, and (hopefully) keep more of your profits!
- Get an LLC
- If this is going to be a real business for you, then registering as an LLC should be your first step.
- Once you cross around 50-60k in profits annually, I would recommend you start looking into converting into an S-Corp, because that will save you self-employment taxes. The downside of an S-Corp is that you need to have an employee – yourself or someone else – which means taxes need to be paid. You can pay the employee (most likely you) a lower amount rather than paying it on your total profits.
- Types of Expenses:
- Start-Up Costs: Little known fact- you can deduct up to $3,000 of start up expenses without having any income.
- Vehicle Expenses
- Operational Expenses: Advertising, Supplies, Shipping etc.
- Home Office Expenses
- Cell Phone
- Education: WTA Courses etc.
- Professional Services: Accounting, taxes, legal etc.
- Platform service fees: Ebay, Paypal, Chrono24 etc.
- Meals & Entertainment: Prior to 2018, 50% of most meals and entertainment expenses were tax deductible. With the new tax laws issued in 2018, entertainment expenses are mostly non-deductible with some exceptions; meals expenses are still deductible up to 50%. There are some of these expenses that are also deductible 100%. The following link goes into better detail regarding this expense. https://www.forbes.com/sites/forbesnycouncil/2018/11/13/how-the-new-tax-laws-affect-your-meals-and-entertainment-deductions-for-2018/#48404e40606b
- Recordkeeping: Keep the most accurate records you can.
- Try to transact all of your deductible expenses through means that leave a paper trail, like using credit cards, debit cards, wires, etc. For cash transactions (when you HAVE to do them), keep the receipts.
- When selling, create invoices for yourself, detailing the watch sold, date, and amount that match up with a wire you received. Save them on your computer.
- Its also good to keep track of your income and expenses on Excel or an accounting software like QuickBooks, but either save the physical receipts or scan them and save them digitally.
- Best practices for audit prevention
- Refer to tip 3. Proper recordkeeping is the best form of audit protection.
- You could trigger an audit if you continuously show losses on your business for over three years.
- Using round numbers ending with 0 or 5, on a consistent basis can be a flag to the IRS.
- Having an LLC or a Corporation, reduces your chances of being audited, compared to being self-employed.
- Significant changes in income or expenses. The change could be real, but you could still get a call from the IRS.
- Getting a reseller certificate
- If you graduate up to some serious trading and are starting to buy from other businesses like jewelers or Authorized Dealers, sometimes they would like you to have a reseller certificate if you do a lot of volume with them.
- You can apply for a reseller certificate under your company name with your state’s department of revenue.
- One thing to consider here is that if you do get a reseller certificate, some states require you to file a report monthly – even if you have not done any sales for that month. Chances are if you are at this stage, you’ll be transacting every month.
- With a reseller certificate, you can buy tax-free, but when you sell, you will need to collect taxes from your customer.
- There are certain situations where you do not need to collect sales tax, like shipping out of state, but that has become a little tricky under the new Wayfair Act laws.
- You do not really need a reseller certificate to avoid sales tax when buying from businesses, especially when you are in a different state. But again some dealers might refer to the Wayfair Act as an excuse for their requirement.
- Some more details about reseller certificates: https://www.bigcommerce.com/blog/resale-certificates/#undefined
- How out of state purchases are taxed: https://www.thebalance.com/sales-taxes-across-state-lines-4058714
- Wayfair Act:
I just wanted to mention this in here, since many of you will probably have questions about it. The Act basically now requires an out of state seller to collect sales tax from the purchaser. But you need to meet a certain dollar threshold or reach a certain number of transactions before this applies to you. The thresholds are different for every state. For most of you, you do not need to worry about this.
The threshold rules apply to how much you sell into a state. For example, in Illinois, if you sell over $100,000 in gross receipts or do over 200 sales into Illinois in the preceding 12 months, then you as the seller need to charge sales tax. Exceptions apply to sales for resell, etc.
You can find more details about the Wayfair Act and its requirements here: https://www.avalara.com/us/en/learn/sales-tax/south-dakota-wayfair.html