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 website. Traders and taxes has become so mainstream that many websites and trader tax “experts” have emerged.
There is an incredible amount of misinformation provided to the general public and trading community by certain websites 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 website 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 two decades (well before it became fashionable). We an 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 particular individual.
There really is no such thing as “trader status” as it is used commonly on popular websites. 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:
The following facts and circumstances should be considered in determining if your activity is a securities trading business.
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 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 charge.