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I am planning to file this year's tax return using "Trader" status, and am
interested in the experiences of others on the list who are doing this.
The major advantage of this strategy is that you are able to deduct, dollar
for dollar, the expenses incurred in your trading business. If you do not
establish yourself as a "Schedule C -- Trader," you will be forced to
deduct your investment expenses as miscellaneous itemized deductions on
Schedule A, and these deductions are subject to the 2% of Adjusted Gross
Income exclusion.
In his 1997 book, THE TRADER'S TAX SURVIVAL GUIDE (Revised), Ted Tesser
covers this area pretty well. Following are several excerpts from his book
regarding the distinction between "investors" and "traders":
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"The Internal Revenue Code does not define 'trade or business.'
Determining whether a taxpayer's trading activities rise to the level of
carrying on a trade or business turns on the facts and circumstances of
each case.
"In determining whether taxpayers who manage their own investments are
traders, relevant considerations are the taxpayer's investment intent, the
nature of the income to be derived from the activity, and the frequency,
extent, and regularity of the taxpayer's securities transactions.
" . . . the "Federal Tax Report" states that traders' profits are derived
from the direct management of purchasing and selling. Investors, though,
derive profit from interest, dividends, and capital appreciation of
securities. They are primarily interested in the longer-term growth
potential of their stocks.
"Traders, in contrast, buy and sell securities with reasonable frequency in
an endeavor to catch the swings in the daily market movements and thereby
profit on a short-term basis.
"Thus, the two fundamental criteria that distinguish traders from investors
are the LENGTH OF THE HOLDING PERIOD and the SOURCE OF THE PROFIT."
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For those of you that have been filing using "Trader" status, do you have
any "words of wisdom" to pass on? Have you ever been audited, and did the
IRS see it your way? Any caveats?
Thanks.
Bill
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