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Is Your Client
an INVESTOR? a TRADER? or a MARK-TO-MARKET
TRADER?
~ by
Nancy E Goedecke, EA ~
Page 2
The courts have
required evidence of:
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Frequent, regular,
and continuous trading activity (Preferably, daily and year round)
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Substantial time
and energy devoted to trading activity (Preferably, a full-time job)
-
Goal is to profit
from short-term market fluctuations rather than from long-term gains or
dividend income
Other considerations include:
-
Overall profitability of the activity
after expenses
-
No other regular full-time job or profession
-
Eligible for trader status year after
year
Additionally, the IRS will look for:
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Daily record keeping activity
-
Independence in decision making and
research activity
-
Minimal dividend or interest income
from trading activity
-
High volume of transactions, i.e., number
of shares traded, not dollar costs
-
Positions held for less than thirty
days
In contrast, Investors focus on long-term
capital appreciation and usually have another occupation or line of work.
In general, a taxpayer who works a full-time job then trades stock before
or after work will be classified as an Investor.
[See citations: Investor vs Trader References
& Court Cases].
Carefully consider the circumstances of your client. To be treated as a trader, a taxpayer's trading activity must be regular, continuous, extensive and intended for short-swing gain. Certainly if the taxpayer's primary goal is holding investments for long-term appreciation, trader status does not apply. Unless taxpayers clearly meet the tests, they probably should be treated as investors. You might also discuss the hobby loss rules with your trader-client.
Note: Day Traders are allowed to hold stocks for the long term if they are held in a separate account and not day traded. The trader must tell the IRS these long term positions exist and they are not assets of a day-trading business.
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