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I have a personal investing style which nets me exceptional returns for small investments (under $600k) and 2% - 8% better than index funds (annualized) on larger investments. Let's say my parents would like to get in on the action, but they don't have the technical skill required to execute the trades in a way that nets the same results. This style requires me to execute around 20 sell orders followed by around 20 buy orders at least once a week. I know I could technically have my parents open their own investment account and provide me with the credentials so I could make the investments for them, but given the time it takes to execute all the orders, I am looking for a way to avoid that. What would be the implications of my parents "buying into" my investment portfolio by sending me some money to invest on their behalf but putting it in my investment account?

Things I am thinking about which might be a problem are:

  1. How do I report taxes for myself and for them correctly and separately? I have a higher income and thus a higher tax rate than they do, so they wouldn't want me to pay the taxes based on my making the money and then give them what was left. They would want to pay the taxes at their rate.

  2. How do I transfer the proceeds back to them in a year or two or whenever they decide to cash out, without needing to pay taxes on it a second time?

  3. Now, what if my brother and/or sisters want to get in on the trading, as well?

Is there some easy way to do this without running afoul of the SEC and IRS which does not require me to initiate the trades in multiple different trading accounts?

Dheer
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user36048
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2 Answers2

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It sounds like maybe you want an "investment club". As defined by the SEC:

An investment club is a group of people who pool their money to make investments. Usually, investment clubs are organized as partnerships and, after the members study different investments, the group decides to buy or sell based on a majority vote of the members. Club meetings may be educational and each member may actively participate in investment decisions.

These "typically" do not need to register:

Investment clubs usually do not have to register, or register the offer and sale of their own membership interests, with the SEC. But since each investment club is unique, each club should decide if it needs to register and comply with securities laws.

There's more information from the SEC here: http://www.sec.gov/investor/pubs/invclub.htm

The taxes depend on how you organized the club, i.e. if you organize as a partnership, I believe that you will be taxed as a partnership. (Not 100% sure.) Some online brokerages have special accounts specifically for investment clubs. Check around.

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i think separate accounts is the simplest way to go. if the tax breaks are significant, then the inconvenience should be worth it.

you could gift or loan money back and forth. done properly, it should be technically legal (or grey enough to not cause irs trouble). specifically, they could gift you 100k$ in january and then you could gift them 110k$ in december, leaving a net gift of 10k$ for the year from you to them, which is under the annual gift tax exclusion. based on market performance, you could gift back exactly enough to hit the gift tax exclusion and keep the rest in their "account" with you. loans would work similarly, but the irs tends to treat undocumented or interest-free loans as weird gifts. but honestly, you might just be trading day-to-day overhead for tax audit risk.

lastly, no offense meant, but i suspect that your strategy is probably just some form of martingale betting system, and you might cause some serious family strife when you eventually meet your gambler's ruin. even if everything goes smoothly, it would take some serious trust for your family to assume that you only netted them 10% roi, when your spending habits make it look like you are getting 30%. even if you used a single account, documenting the trades to their satisfaction might be more hassle than maintaining a separate account. personally, i would not trade family accord for another 2% roi.

teldon james turner
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