You probably have heard many times that we should treat our investing / trading as a business, right?

Hobbies cost money – businesses make money.

I always wanted to treat my trading as a business but never knew how exactly to do that, so I always referred to my investing as a hobby. Whenever anybody asked me “what are your hobbies” my answer always was: “I collect historical military stuff such as uniforms from WWII era, do re-enactment, collect movies, read books, camping, traveling, and investing in stocks.”

Well, not anymore.

If you follow my blog for some time you may have noticed that I was planning on starting business of trading. There are two reasons for trading as a business. One is psychological, the second is financial, more precisely the tax implication reason.

So what is the psychological aspect?

Running trading as a business requires a lot of discipline in order to make money. By separating trading from my personal accounts to a business gives me the right mental statue. Now I have a bigger responsibility in order to make money. The responsibility goes towards the right cash flow management. The business must make money. It is no longer a hobby or just saving money for a distant future as a traditional passive saving in 401k (for example) is.

In order to survive, I must strive to keep my cash flow positive and grow my business every day, week, month, and year.

The idea of trading as a business always inspired my entrepreneurial spirit in me and inspired me to always take my trading more than seriously. My dream of trading as a business is slowly becoming true.

Research in the past performed by Trader’s Accounting has shown that 75% – 90% of new traders fail within the first 16 – 24 months due to lack of discipline approach (treating their trading as a hobby), lack of resources, and bad tax treatment.

Only 10% – 25% of traders break through and continue successfully further. They start growing their accounts consistently over time.

Although I do not expect my business to provide me with money for a living due to a very small starting capital, I have an ambitious plan to reach that milestone in five years.

What is the financial aspect?

The second and important aspect of trading as a business is taxes. If you take a look at my income results at My Trades & Income page, I am poised to have $8,884.25 income ($7,825.55 from options and thus short term capital gain), see below:

If I have to add this income to my personal taxes as a short term capital gain, I will end up paying 25 – 30% more in taxes. As a business my taxation will be a lot more favorable under the 60/40 rule. Under the current law (which, by the way, Obama tried to repeal in 2011) a trader can treat 60% of his income from day-to-day trading of options, futures, and forex as a long term capital gain and 40% as a short term capital gain.

Also as a business, trader can deduct all of his losses and expenses which are not allowed for individual investors. Tax savings can be substantial and can easily reach 50% in average.

And the last?

Trading as a business can provide me with my dreamed financial freedom now. Not 20 or 30 years later, after I save enough for retirement.

Trading for a living can be exciting, dramatic, stressful, and fulfilling. It can ruin you or make you happy and free. It took me 8 years to get to this point of converting my personal accounts into business accounts. Eight years of learning, trials and errors, substantial losses, (yes I lost a lot of money) and finally last three years – a success.

If you want inspiration and think of getting yourself to this path, watch the following video below from a Wall Street Warriors, episode 1, Season 1. I recommend you watching all episodes. They are very interesting and inspiring.

 

 

What would it take for you to start trading as a business and would it be something you would want to pursue?

Happy Trading!