The IRS finally recognized and acknowledged the existence of
traders in securities and commodities in the 1997 Revenue Act, although there was no
formal or precise definition of what activity constituted sufficient activity to
"qualify" as a trader. In 2000, the IRS published additional information about
traders in Publication 550, filing forms instructions and on the IRS web site. Traders and
taxes has become so mainstream that even JK Lasser attempts to explain the new rules
concerning traders in his 2001 publication. We have found JK Lasser to be quite thorough
and correct in the information he provides, although we believe that some of his
information concerning traders is incorrect.
This should not be surprising as there is an incredible
amount of misinformation provided to the general public and trading community by certain
web sites and by otherwise credible and competent tax professionals who simply do not have
the expertise or have not obtained the knowledge needed to advise traders.
This Web site has been designed to provide helpful
information to traders by someone who trades himself and has a natural empathy with
traders and most importantly by Mr. Rogofsky, who has prepared taxes for traders for over
a decade (well before it became fashionable). We can summon years of practical
applications based on real-life experiences to enhance our reading and interpretation of
current tax laws and issues concerning traders.
Trading has progressed (and still continues to progress and
expand) from the initial traders using TC 2000 and/or purchasing some expert's
"surefire winning system" to the art and rapid fire reflexes needed to trade
today's direct access trading platforms utilizing various methods that work for a
There really is no such thing as "trader status"
as it is used commonly on popular Web sites. There is no election for trader status nor
does the IRS acknowledge or approve something called trader status. What commentators or
tax preparers are calling trader status is that the taxpayer or tax preparer has
determined (correctly or incorrectly) that the level of trading activity by the taxpayer
is sufficient to justify calling the taxpayer a trader. The taxpayer will then file Form
1040 Schedule C with all ordinary, reasonable and necessary trading expenses claimed on
Schedule C as opposed to claiming expenses on Form 1040 Schedule A as an investor.
The IRS never defines who is a trader. IRS Publication 550,
however has "suggested guidelines" based on prior Court decisions to be used in
determining whether a taxpayer qualifies as a "trader".
IRS Publication 550 lists certain conditions which must be met to be considered as engaged
in business as a trader:
· You must seek to profit from daily market movements in
the prices of securities and not from dividends, interest or capital appreciation
· Your activity must be substantial
· You must carry on the activity with continuity and regularity
The following facts and circumstances should be considered in determining if your activity
is a securities trading business.
· Typical holding periods for securities bought and sold
· The frequency and dollar amount of your trades during the year
· The extent to which you pursue the activity to produce income for a livelihood.
· The amount of time you devote to the activity.
Basically, taxpayers must determine on their own or have a
qualified professional determine whether the level of trading activity justifies taking
the reasonable position that one should file as a trader and reap the benefits that result
from filing and reporting expenses as a trader rather than an investor. There are no magic
numbers for either the amount of trades required or hours spent on trading related
activity that will make you a trader for tax purposes. Instead, it is a subjective
judgment based on many factors.
THERE ARE MANY INDIVIDUALS WHO WORK A FULL TIME JOB THAT
ALSO RUN A SECOND BUSINESS, WHETHER THEY ARE A PAINTER, ACCOUNTANT, CARPENTER, LIMOUSINE
DRIVER, ETC. THESE PEOPLE ARE REQUIRED BY THE IRS TO REPORT THIS BUSINESS ACTIVITY ON
SCHEDULE C AS A TRADE OR BUSINESS. WHY SHOULD THESE SAME RULES NOT APPLY TO
TRADERS, ASSUMING THERE IS SUFFICIENT ACTIVITY AND TIME SPENT TO JUSTIFY THAT A BUSINESS
IS IN FACT CREATED AND RUN?
Our trader evaluation questionnaire can assist you in
helping you to answer the question of whether or not you qualify as a trader. Please fill
it out and submit it to us. We will evaluate you answers and email you our opinion at no
Traders | MTM Traders | Section 475 Election | Investors