Offering Advice & Services to Traders | Investors | Funds
Hedge Fund Taxes
Our Customers
We would like to thank Hannah and the company for their invaluable help in forming our incubator hedge fund. They were extremely knowledgeable, efficient, and professional while working with us, and we are glad to have them as a vital resource as we grow our incubator hedge fund into a full-fledged one. Dale Angus, Golden Egg Capital Management LLC. March 28, 2012.
Electing Mark-to-Market Tax Treatment in the United States Section 475(f) of the tax code allows an active securities trader to treat all securities as: generating ordinary income or loss, and if held at year-end, marked to market (treated as sold for fair market value on 12/31 and then repurchased at that value on 1/1). Mark-to-market refers to the procedure followed at year end when all open positions are marked to market value. In effect a sale of all open positions (long and short) is triggered for tax purposes at year end using the year end market prices. On the first day of the following year those positions are bought back for the same market value. This tax treatment flushes out all realized and unrealized gains and losses for U.S. tax reporting purposes. An active trader may elect MTM for trading gains and losses and use the accrual or cash method of accounting for business expenses.
Should I Consider a MTM Election? Only someone who qualifies as an active securities trader can elect MTM treatment. Although the MTM election can be made in a year in which you qualify as an active trader, the MTM election once made applies to subsequent years whether or not you are an active trader in later years. Before Electing Mark-to-Market Tax Treatment The decision making process is influenced by the fact that this election is a permanent election that can be revoked only with the consent of the IRS. However you could still establish an investment securities account or an investment company whose positions are outside the scope of the election. Trades in these other accounts generate capital gain or loss. Futures contracts (such as most index options) in mark-to-market accounts are still entitled to special tax treatment. MTM is not a preferred accounting method for profitable commodities and futures traders as the default tax rates favor them: 60% long term and 40% short term capital gain. The current maximum blended tax rate on commodities and futures is 23% versus 35% on securities. Electing MTM converts commodities and futures trading capital gains and losses (60/40 treatment) to ordinary gain and loss treatment (a 12% tax rate increase). But if you have large commodity trading losses before April 15 of the current year, electing MTM will allow the losses to be treated as ordinary.
Some Strategies for Making the Election 1. As the election is specific to the active trader, it is best made by an entity, rather than an individual taxpayer. An S corporation is easier to liquidate than an individual. The individual unhappy with his or her election needs to cease trading activities and become inactive (trading in the interim should be conducted through an entity) so that trading status lapses.
2. Make sure you (or your entity) are an active securities trader. There is no bright line test for trader versus investor status based on what little legal precedent exist. Make sure you have significant portfolio turnover on an annualized basis. Other factors (use of a margin account, options, futures, and short selling) can support active trader status.
3. The election for an active trader must be made by the original due date of his tax return for the current year with no exceptions. For a new trading entity, you must elect within 75 days of the start of trading activities, and then include the election in the entity's first tax return.
4. If your mix of positions includes both active trading and buying some positions (or taking some shorts), for the longer term you should establish an investment securities account. This account can be at the same brokerage where your active trading account is maintained.
International Taxes Hedge funds should be aware of possible international filings if either they own an interest in a foreign entity or have an investor who is a non-U.S. taxpayer. Non-compliance with international tax filings could result in significant penalties. For example, a penalty for late filing of a return could be as high as 25% of the unpaid tax. In addition, FATCA requires non-U.S. financial institutions and non-U.S. entities (including offshore investment funds) to provide information to the IRS identifying U.S. persons invested in non-U.S. bank and securities accounts. The legislation is motivated by incidents of U.S. persons failing to report foreign-source income for U.S. income tax purposes. A 30% withholding tax applies on any "withholdable payment” made to a foreign financial institution (FFI) unless the FFI agrees with the IRS to take a number of specific steps pursuant to an FFI agreement. The specific steps are designed to ensure that U.S. persons are identified and U.S. tax is imposed on their investment income.
U.S. Hedge Funds U.S. funds are organized as limited partnerships to accommodate investors that are subject to U.S. tax. Offshore Hedge Funds Offshore funds are organized as corporations or trusts for marketing, tax, and legal reasons. If U.S. investors invest in or effectively control an offshore fund, complex U.S. tax rules (and complicated U.S. filing requirements) are operable (e.g., controlled foreign corporations, foreign personal holding companies, and passive foreign investment companies (PFIC) and need attention.
Although an offshore fund generally does not have state tax issues, some states require partnerships to file state partnership tax returns if they have partners that are state residents. This could result in an offshore fund (e.g., one with a check-the-box election in effect and a New York feeder hedge fund as an investor) being required to file a state tax return even if it has no U.S.-source income and no ECI. Some of the issues are manageable, others are not and the offshore fund may be better off skipping or significantly limiting the presence of U.S. investors. Learn More About Offshore Hedge Funds
U.S. tax-exempt investors prefer offshore funds because of tax considerations. Under U.S. law a tax-exempt investor (such as an IRA, an ERISA-type retirement plan, a foundation, or an endowment) is liable for income tax on "unrelated business taxable income" (UBTI or UBIT) notwithstanding its tax-exempt status. This tax exposure exists when a U.S. tax-exempt investor invests in a fund that trades on margin. In those cases where complete investor confidentiality and privacy are necessary, an offshore fund should not accept any U.S. investors (tax-exempt or otherwise) and the fund manager should not be located in the United States. Master Hedge Funds A master fund allows a fund manager to manage money for a broad spectrum of investors. The master fund is organized as an offshore corporation or trust (but can be taxed as a partnership only for U.S. tax purposes via a check-the-box election filed on Form 8832). A fund manager can pool money from country-specific feeder funds in the master fund. Trading gains are allocated to the feeder funds based on the percentage of assets under management.
Our Customers I would like to state unequivocally that I have had a completely positive experience in dealing with Capital Management Services Group. Truly, from the first phone call that I made to Capital Management, to the conference call that was arranged with Hannah Terhune, the time she took in answering all of my questions, and, finally, to the follow-up by Amy Hong. My case involved the establishment of a Forex Incubator Fund, and was thoroughly handled. Hannah Terhune responded promptly to my subsequent phone calls and Amy Hong is absolutely 100% efficient. I, certainly, plan to enlist Capital Management's services for my legal needs in the future concerning fund management. I would rate my experience and results 5 out of 5 stars! Totally satisfied, Rxxxxxx Sxxxx, September 22, 2010
Compensation Planning A manager of the offshore fund should ensure that his contracts are prepared so as to allow deferral of management and incentive fees. Through the use of properly prepared fund documents and the use of outside directors, a fund manager will be to defer for tax purposes substantial amounts of money (e.g., both the deferred fees and earnings on the fees compounded tax free in the fund).
International Traders Many international traders own U.S.-brokerage accounts and wonder if they will owe U.S. taxes. When a nonresident trader has a U.S. brokerage account, only interest and dividends earnings are subject to U.S. withholding tax. No U.S. withholding tax should apply to capital gains. Many brokerages will withhold taxes anyway. Nonresidents (individual or business) can file for a tax refund using a Form 1040NR and then properly structure their U.S. focused trading to prevent mistakes in the future. In most cases, U.S. tax liability does not arise. However, ownership in a "landed" U.S. business activity can trigger a U.S. tax bill and filing. If a nonresident trader owns a U.S.-brokerage account and spends more than 183 days in the United States (meeting either U.S. substantial presence test), U.S. source net capital gains are subject to U.S. tax. Most U.S. tax treaties contain provisions that reduce or eliminate tax on capital gains. The trader could also make a mark-to-market election for the trading activity to be taxed at lower rates. Being part of a U.S. proprietary trading firm business on a K-1 or W-2 basis triggers exposure to U.S. taxation. U.S. Taxes The United States taxes citizens, businesses and residents on worldwide income. It also taxes nonresident individuals (meaning no green card or long-term U.S. presence) and businesses on U.S. source income at tiered rates based on net taxable income. Most other U.S. source income is taxed at a flat 30% rate through payer withholding. Withholding taxes often are reduced or eliminated in the case of payments to residents of countries with which the U.S. has an income tax treaty. In addition, certain statutory exemptions from withholding taxes are provided. Income of a non-resident alien individual or foreign corporation that is effectively connected with the conduct of a trade or business in the United States is subject to tax at the normal graduated rates based on net taxable income.
Deductions are allowed in computing effectively connected taxable income (ECI). Withholding taxes often are reduced or eliminated in the case of payments to residents of countries with which the U.S. has an income tax treaty. In addition, certain statutory exemptions from withholding taxes are provided. U.S. source non-ECI connected capital gains of non-resident alien individuals and foreign corporations generally are exempt from U.S. tax, with two exceptions: (1) gains realized by a non-resident alien individual who is present in the U.S. for at least 183 days during the taxable year, and (2) certain gains from the disposition of interests in U.S. real estate. The source of income received by non-resident alien individuals and foreign corporations is determined under rules contained in the Internal Revenue Code (Code). Interest and dividends paid by a U.S. citizen or resident or by a U.S. corporation generally are considered U.S. source income.
Consultations with veteran fund and international tax attorney Hannah Terhune allow you to customize your legal, regulatory, business and tax plans. She will discuss business development, tax, accounting, reporting and business strategies that will help you with your fund formation. Her focus is your long-term success; not selling you services you don't need. Talk to us at the earliest stages of your plans to avoid wasted time and money. Our focus on tax and securities law, assists with start-ups, incubators, small hedge funds and family offices, as well as establishing investment advisors. All of our legal work incorporates tax services and planning, with individualized tax, legal services and solutions to meet your needs. We do not sell or support canned business plans like our competitors. We offer the best value in the industry, some of the lowest prices in the world, outstanding support and customer service,no-obligation consults and free web and media content so that you can make informed decisions. You can purchase a 30 or 60 minute consultation through our eStore or by calling the office at (307) 213-4732.
Wouldn't you like to learn the same exclusive tips and time proven techniques that experienced attorney Hannah Terhune is privy to? By subscribing to Ms. Terhune's Planning Ideas for Traders | Investors | Funds you receive information and ideas that may spell the difference between failure and success. Click Here to receive your free newsletter that contains exclusive information for our subscribers.
Why Hire Us? We have advised investment advisers, financial planners, and accountants on matters such as investment adviser registration, investment advisory agreements, investment suitability, state/federal compliance issues, the avoidance of client and regulatory complaints, and potential conflicts of interest.
Small- to medium-size clients often rely upon us as an "outsourced" legal counsel and compliance adviser. We provide these services to many investment advisers at a great savings over the cost of hiring and maintaining a legal department. We regularly assist the legal and compliance departments of medium to large size investment advisory firms. We represent large advisors with significant internal legal capabilities who seek to leverage our extensive experience in complex issues and the latest developments. We have been an active counselor in numerous transactions involving the purchase, sale, or merger of investment advisory practices.
We regularly provide advice regarding securities, derivatives, tax, ERISA, litigation and other legal matters to a variety of registered investment companies and hedge funds. Additionally, we provide assistance with the formation and operation of mutual funds, hedge funds, venture capital funds, and other private equity and commodity pools. We also provide compliance services, including analysis and development of compliance policies and procedures, compliance audits, and draft disclosures and responses to SEC examinations and document requests.
We have acted as counsel to limited liability companies, commodity pools, and open-end and closed-end funds registered with the SEC. We represent broker-dealers and other securities professionals in their capital market transactions and regulations, advising them on all aspects of U.S. federal and state securities and commodities laws, including regulation by the national securities exchanges, the NASD and other self- regulatory organizations, and assisting them with respect to regulatory audits, continuing education, licensing, and enforcement matters.
CapitalManagementServicesGroup.com is recognized by discriminating fund managers and businessmen as being the foremost tax and legal authority in the business. Attorney Hannah Terhune's education and experience are unsurpassed in the area of hedge funds creation and management platforms, and the complex body of related tax laws. Ms. Terhune's extensive knowledge and experience have made her an indispensable resource for serious hedge fund and business professionals. Ms. Terhune's articles on the subjects have appeared in over 100 publications worldwide. Chances are, if you have read about the above matters, Ms. Terhune has written about them.
Give us the opportunity to use that knowledge and experience for you. We have both regulatory experience and the understanding of the foreign exchange and securities markets. We know how to navigate the compliance with rules and regulations in the United States as well as in regulated jurisdictions such as United Kingdom, Singapore, Hong Kong, Canada and the British Virgin Islands. Each client receives personalized attention from our attorneys and staff. No client is too large or small though because of our boutique size. We pride ourselves in providing personal attention to each client.
CMSG provides the best services and support needed for hedge funds and business projects. No need to coordinate work between different firms--we handle the entire business process from start to finish. We offer accounting, tax planning services, tax return preparation, business consulting, and U.S. and international company formation services. Our professionals provide the highest quality services at competitive rates. But don't take our word for it, give us a call and let us prove what we can do for you. Read our Leading Media Articles, Customer Testimonials and learn more About Us.
Personal Consultations You get answers to your specific questions by speaking directly to Hannah Terhune, an experienced hedge fund and international tax attorney. Ms. Terhune's hard-earned knowledge and experience can be put to work to save you unnecessary steps and costly wasted effort. The consult is an invaluable opportunity to speak to Hannah one-on-one, and learn how to achieve more in less time. As a result, you can anticipate that the return on your investment will far outweigh the costs associated with our unsurpassed services. Ms. Terhune's credentials reflect an invaluable resource that combines a well-informed professional practitioner with sound ethical judgment that cannot be over-estimated. The expertise required to recommend best solutions and provide sound advice should never be taken lightly. We are confident that when you are finished with your consultation, you will be impressed and more informed about your business plans than ever before. Call (307) 213-4732 or Click Here to Request Services. Our Commitment Henry David Thoreau wrote: "Do not hire a man who works for money, but him who does it for love of it." We are committed to your business plans and bringing you the best possible options. We are an established and internationally recognized business that serves and educates our clients throughout the industry. We do this by striving for the best results. Above all, we are a law firm. A lawyer is a philosopher and role model. The ability to improve our clients' lives is a privilege that we do not take lightly. There is tremendous power in being able to effect a positive change in our clients' lives. Our aim is to welcome our clients and to provide a comfortable, warm environment for all. Thanks for visiting our website. We hope to have the opportunity to serve you.
