Paying Taxes on Commodity Trading
If you trade commodities, you should receive a 1099-B Form from your broker before Jan. 31, following the end of the tax year. It will state your profits and losses from the previous year’s commodity trading. Subtract the losses from your profits, and that will give your capital gains. Your capital gains from commodities will be taxed in two ways:
60% of the capital gains are taxed at long-term rates40% of the capital gains are taxed at short-term rates
Long-term capital gains tax rates are 0%, 15%, or 20%, depending on how much you make, Short-term capital gains tax rates are the same as your normal tax rate based on your income tax bracket.
Examples of Filing Taxes on Commodities
Let’s say that you hypothetically traded commodities in 2022, and estimate that you netted a $5,000 profit for the tax year. To make certain, you wait to receive your 1099-B form from your broker in January 2023. This is likely called form 1099-B Proceeds from Broker and Barter Exchange Transactions. It will list your investment profits and losses for the year. Once you have that form, you can fill out IRS Form 6781 to determine the tax you need to pay on your commodities trading. On the form’s line 1, enter your gains and losses from your 1099-B Form. You’ll add these together on line 2 and then will combine columns b and c to get a total gain or loss on line 3. Let’s say that after you do this, you see that you earned a gain of $5,000 from your commodities trading in 2022. Now, you have to calculate the capital gains tax. You’ll need to figure out how much of your $5,000 is taxed at long-term rates and short-term rates. Do this by multiplying $5,000 by 60% and then $5,000 by 40%: $5,000 x 60% = $3,000 $5,000 x 40% = $2,000 This info goes on lines 8 and 9 on form 6781. After you’re done filling out form 6781, you’ll plug these numbers into your Schedule D Capital Gains and Losses—there are two sections, one for short-term gains (or losses) and one for long-term gains (or losses). After you complete the Schedule D calculations, transfer the numbers to your tax return Form 1040 and you are done.
What About Trader Tax Status?
There are some favorable issues for those who can claim trader tax status. To qualify for trader tax status, you must be a full-time trader whose work is considered a business. If you trade via a stock app a few hours a day, it’s likely that the IRS will consider you an investor and not a trader. With a trader tax status, you can claim your losses and any business expenses as ordinary losses and they can be deducted directly from your income. Also, the losses are not subject to the maximum of $3,000 in capital losses. Always keep in mind that tax policies can change on the federal and local levels. Therefore, it is always wise to consult a tax professional for help in preparing and filing returns to make sure that you are in full compliance with the law while taking advantage of all benefits allowed under the tax code.
