LA City is sending business tax notices to traders. Here’s why gross receipts may be $0—and how to respond.
The City of Los Angeles has started sending Business Tax Registration Certificate (BTRC) notices to local residents flagged by the California Franchise Tax Board. Surprisingly, this includes active traders who qualify for trader tax status (TTS). For these own‑account traders—who have no clients, advisory fees, or broker‑dealer registration—the City’s outreach raises new concerns about whether their trading gains could be treated as taxable “gross receipts.”
Why Traders Are Receiving Notices
The Office of Finance uses Franchise Tax Board data‑matching to identify residents reporting business‑related activity, including Schedule C expenses, Schedule D gains, or Form 4797 trading income. That triggers BTRC notices, even when the activity involves only personal trading.
Traders with a Schedule C file Section 162 business expenses only. Gains and losses appear on Form 8949/Schedule D for capital treatment or Form 4797 for Section 475 MTM ordinary treatment. None of these involves customers. A reasonable position is that taxable gross receipts equal $0. Still, LA has not published a specific exemption for traders, leaving uncertainty.
How the City Defines Business Activity
- Who must register: Anyone “engaged in business” within City limits must register. LAMC §21.03
- Nexus threshold: More than 7 business days per year in Los Angeles triggers registration.
- Passive income: Dividends and interest do not count as business activity.
- Stockbrokers rule: LAMC §21.49 taxes stockbrokers, including those trading on their own accounts, on commissions, fees, and net trading profits. This rule targets registered brokers and dealers with clients, but LA may try to apply it to retail traders.
- Tax rate: Professions and occupations, including stockbrokers, are taxed at $4.25 per $1,000 of gross receipts (0.425%). Know Your Rates
Traders vs. Broker/Dealers
- Dealer: Buys and sells securities as a business, holds inventory, earns spreads, and registers with regulators.
- Agent (Broker): Executes trades for clients and earns commissions.
- Principal: Trades for their own account, often taking the other side of customer trades.
- Market‑maker: A dealer quoting continuous bid/ask prices, always trading against customers.
All of these categories involve customers or counterparties. If a dealer or broker also makes proprietary trades, regulators may lump those together with customer business. Retail traders differ—100% of their trades lack customers, which supports the $0 gross receipts position.
LAMC §21.49 states that an agent or broker who also deals as principal must include trading profits in gross receipts. That makes sense for market‑makers and dealers tied to client business. Applying the same to retail traders, however, stretches the rule beyond its intent and poses more of a misclassification risk than a clear obligation.
Illustrative Scenarios
- Profitable Trader: Earns $1 million in net gains using personal capital. Federal reporting: Form 8949/Schedule D or Form 4797. LA position: no customer receipts = $0 gross receipts. If misclassified as a stockbroker, potential tax = $4,250 (0.425% of $1M).
- Losing Trader: Incurs $100,000 in net losses. LA position: no gross receipts, so no business tax. Even if misclassified, gross receipts net of losses equal $0.
Enforcement via AB63 Notices
The AB63 Unit mails these notices. Recipients must:
- Complete a Business Tax Application (AB63) to register, or
- File an AB63 Alternative Form to claim exemption.
Traders should consider completing the Alternative Form, clearly stating that they trade solely for their own account, and emphasizing that they have no clients. Check the box: “I am not subject to City business tax – see the back of this notice and indicate the reason why you are not subject to the tax.” Failure to respond can result in estimated assessments and penalties.
See: AB63 Program FAQ
Practical Guidance
For own‑account traders, the LA business tax should not apply. But with no published exemption and §21.49 explicitly taxing “stockbrokers trading on their own accounts,” expect challenges and documentation requests. The Small Business Exemption (≤ $100,000 worldwide gross receipts) may provide relief if registration is required.
Key takeaways:
- Respond to notices promptly and keep detailed records.
- State the facts: you trade only your own account and have no customers.
- Be firm yet transparent: TTS matters for federal taxes but does not create LA gross receipts.
- Maintain supporting documentation, including AB63 filings and federal returns.
Disclaimer: This article is for informational purposes only and does not constitute legal or tax advice. You can consult your own tax advisor about your specific situation.
Read more in the full technical version here: GreenTraderTax Blog – Los Angeles Business Tax and Traders