Investment Club Tax: A Primer 

Joining or starting an investment club is a great way to pass the time and possibly earn a little extra scratch along the way. With the right group of people an investment club can be both a profitable and enjoyable venture. Be aware, however, that the business end of investment clubs is not completely fancy-free and there is much you'll have to familiarize yourself with in terms of investment club tax if you want to maintain a legal, operating investment club.

For one, you'll need to appoint a treasurer of sorts in your investment club so that all the money can be collected from the members each month or predetermined pay period. It isn't just that simple, however, because your club will have to have its own "EIN" or employer identification number. This is for investment club tax purposes and so it is imperative that you register by getting Form SS-4 from the nearest social security administration office. Form ss-4 allows you file for your own EIN and avoid any future tax problems. You can, however, create an investment club that allows just one person, probably you, to have control over the affairs by using your own social security number. This makes things a bit easier but if multiple parties want to be involved with the running of the business things can get pretty complicated pretty quickly. If you do manage to try out this route, you'll still need to file for your investment club by getting Form 1099-DIV. This is the standard form that people get when they're trying to register a dividend income. Basically, what a form of this sort does is allow your club to be a sole entity of sorts as well as another source of income.

This is just the tip of the iceberg, though. You'll still have to go through some investment club tax hoops before you're fully in the clear and the next step you'll need to do is determine whether your club is a corporation or a partnership. A corporation has more than two owners or leaders so if you and a friend are the main bosses of the affair you can simply file under a partnership unless you want to go solo and opt for a sole proprietorship. If you're going for a partnership you'll need Form 1065. This will allow you to fill out gains and losses for your club but keep in mind that you'll also need to report your profits on your individual taxes. If this sounds like a lot of legal red tape you are absolutely right; unfortunately, it isn't as easy as simply hanging out and picking stocks with your friend. You can, if you have some extra money, hire an accountant to help you manage all this complex mumbo jumbo and many people do just that. Either way, the one thing to be sure of is that you play ball and follow all the rules laid out by the IRS to ensure that you don't mistakenly go to jail for an innocent slip-up.