Death and taxes
Many traders prefer trading commodities because of the leverage. For most of us, futures have another advantage over stocks, however. Futures also have preferential tax treatment. The taxation of commodities is different from those of stocks in terms of time factor, as shown in "Tax time." As an example, suppose the total gains for a trade are $50,000 (X), the position is held for less than a year and you are in the 35% tax bracket. The results are shown in the second table in "Tax time."
Commodities tax $11,500 ($7,000 + $4,500)
Stock tax $17,500
Commodities savings $6,000
Of course, tax laws are subject to change, and you should consult a qualified accountant or tax adviser to discuss your specific situation. You also need to determine whether a futures contract comes under Section 1256 of the Internal Revenue Code. Section 1256 includes all regulated futures contracts. A regulated futures contract is one traded on a qualified domestic commodities exchange. Regulated futures contracts also can include futures contracts traded on a non-U.S. exchange, but not all futures contracts available for trade that are listed on non-U.S. exchanges are afforded 60-40 tax treatment. These exchanges have to be designated by the U.S. Secretary of the Treasury as a qualified board or exchange.
The bottom line is taxes do affect performance. Further, performance depends on the distribution of returns.
Unless you’re a professional trader, you can’t deduct more than $3,000 in losses per year, so if you have large losses, you can’t write them off. This could reduce performance greatly and even make a winning strategy lose money on a tax-adjusted basis.
Modern trading technology allows us to address real-life issues. These include managing existing trades, distinguishing original signals from secondary signals, money management in concert with multiple-market and trading system portfolios, and taxes. All of these issues are critical to the proper assessment of a complete trading approach.
So much more goes into your ultimate trading success than trading signals. Indeed, the argument can be made that trading signals are the least important element of a trade plan. Today’s tools finally permit us to paint a full picture of potential profits before we risk real money, and that is an edge that has been worth the wait.
Murray A. Ruggiero Jr. is the author of "Cybernetic Trading Strategies" (Wiley). E-mail him at email@example.com.