Hikari's Tools Collection Hikari's Financial Tools Collection

Trader Tax Status

Trader Tax Status! Those three magical words that convert trading activity into the best
of all possible worlds.

If you actively trade financial products (securities, commodities, futures, and currencies)
with the intention of making a living, you may qualify for business treatment with trader
tax status.

From a tax point of view, investors are not treated very well under our tax laws as they
are now constituted.

That's because investing is not considered a business activity and, therefore, not
entitled to the tax advantages available to businesses.

You may call yourself a trader but unless the IRS recognizes you as such you are an
investor just like everyone else. And that means you're stuck with limitations on capital
losses, wash sale rule deferrals, and non-deductibility of trading expenses unless you
itemize, and then only after further limitations. Of course, your gains will be fully
taxed!

However, if you conduct your trading activity in such a manner that it rises to the level
of a business, all kinds of tax advantages suddenly open up to you almost as if by magic,
generating average tax savings well over $10,000 per year.

But there is a catch (isn't there always?). The tax code contains no actual definition of
trader tax status. The IRS has issued guidelines but mostly everything is decided by case
law. In other words, each case is decided on its own merits.

Here's the situation: Investment securities are generally considered to be capital assets
in the hands of whomever owns them. As such, upon sale or other disposition they receive
capital gain or loss treatment, not ordinary income or expense.

Basically there are three recognized categories of activity involving investment
securities: (1) Securities dealers, (2) Exchange traders (market makers, floor traders,
etc.), and (3) Investors.

Securities dealers buy securities (stocks and bonds) from corporate issuers and resell
them to customers (investors). They are middle men, much the same as car dealers that buy
cars from auto manufacturers, take them into inventory, and resell them to the car buying
public.

In the hands of securities dealers, stocks and bonds are not capital assets to be held
for investment but are simply merchandise for resale to customers in the ordinary course
of business. They are clearly in the investment securities business.

Exchange traders, market makers, floor (and off-floor) traders trade for their own account
and risk. They trade for a living. They are clearly in the trading business.

Investors, on the other hand, hold investments for income and long term growth in value.
Although they are free to sell whenever they wish, they are clearly not in the
business of doing so and, therefore, not entitled to business treatment of their
losses and expenses no matter how much time they may devote to nor expense incurred in
their investing activity.

The computer age and the internet has brought about an explosion of trading activity that
has, in many cases, enabled participants to claim trader tax status the same as floor (and
off-floor) traders on an exchange.

It is absolutely vital that you engage the services of competent professionals that
specialize in trader tax status matters.

Walk into any national chain of tax offices and ask about "trader tax status", "mark-to-
market accounting" (MTM), "net operating losses" and in almost every instance you will
get a blank stare from a tax preparer who doesn't have a clue about these laws and
benefits.

Ask your local CPA or tax attorney and they may know a little about it but probably not
much. Many law and accounting firms have not shown much interest in the small business
trader. The larger firms prefer to cater to the interests, research, and practices of
large corporations and public companies.

Trader tax status laws are complex and vague, with many nuances, most of which require
professional judgement based on specialization. Unless a CPA or tax attorney handles
many trader tax status clients, their advice will probably be inadequate.

Random Posts

• Inside UK: Bristol Car Insurance
• Good News! There Are Legitimate Home based Business Opportunities
• Auto insurance and your age
• Health insurance companies hike premiums
• Legal Paternity – Legal Points
• What should your policy contain
• Easy Getting Cash
• Finding the Best Auto Insurance for All Cars
• Guide to Free Debt Consolidation
• Another Promising Investment