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Thank you for your interest in the Trader Status matter. It is something I
feel is vitally important to each trader.
The responses I've gotten to my posting has been a bit overwhelming. I will
try to answer all questions anonomously in a general posting, as to provide
general info to all who are intereted. If you submitted a question, I will
try to get to it. remember this is my busiest time. Thanks for your
patience.
QUESTION:
"Briefly, from 5/97 thru 11/97, I daytraded stocks all day almost every day,
from home, with 2:1 margin, and netted a loss. I made about 1500 trades.
Before that period, I made W2 salary, and in December did a 1099 consulting
gig (I'm a telecom engineer).
I'd like to expense my trading business for full deduction on Schedule-C (no
2% limit). I'll use Schedule D to report my short term cap loss, take the 3%
now, and carry the rest over for next year. What I'd like to expense on
Schedule C is a computer upgrade, realtime datafeed, trading software, books,
etc. Also I'd like to deduct margin interest (Schedule A, I believe).
Does this sound reasonable?"
ANSWER: Most of it sounds reasonable if you qualify for trader status (TS). I
can give you my opinion on that when you fill out the questionnaire and email
it back to me.
The W2 doeesn't preclude TS if you meet other criterea. 1500 trades are good.
You can take up to $3000 (not 3%) net loss in any one year unless you elect
section 175 if you qualify, and then more. You can expense these items as a
trader, however, software is not subject to section 179 (must depreciate) and
you cant take any 179 if you don't have income from trading. Other expenses
seem reasonable if you qualify for TS. Margin interest becomes trading
interest if you qualify (Sch C - not A).
QUEST:
1. What is the proper way to file the Schedule C ? Only put the expenses
on Schedule c? And Gains on 6781?
2. Can you give me a tax court ruling or some offical ruling that I
could have my accountant use to support me, should an audit occur, in
regards to the accepted practice of a Trader filing a Schedule C. My
accountant and I are confident that Self-employmet taxes are not a
concern. We are just trying to find a prior ruling that we can base my
filing of the Schedule C on. I am assuming that I qualify for Trader
status for the purpose of this matter.
ANS:
1) Gains on Schedule D, expenses on Sch C: (6781 for section 1256
transactions)
2) Self employment taxes are not a factor unless you own or lease a seat on an
exchange, or trade from the floor. The filing of a schedule C is the way the
IRS wants it - Specialized Financial Products Division. We've been doing it
for years this way.
Here are some rulings - there are hundreds. Although not all were decided in
favor of the trader status for the specific case, the guidelines were
established:
Some Key Trader Cases:
1) Snyder v. Commissioner (1935): Supreme court stated taxpayer can be
involved in the business of trading securities.
2) Higgins v. commissioner (1941): Supreme court ruled that whether or not the
trading activities of a taxpayer constitute carrying on a business requires an
examination of the facts of each case individually.
3) Fuld v. Comm (1943): Taxpayers held to be Traders because of large number
of trades, none of which were held for up to two years.
4) Commissioner v. Nubar (1951): It was held that the extensive trading of
stocks and commodities constituted engaging in a trade or business.
5) Kemon v. Commissioner (1953): Court determined that Traders are sellers who
take advantage of short term price fluctuations to sell at a gain over cost.
6) Liang v. Commissioner (1955): Relevant considerations to Trader status is
intent of Trader to derive profits from a frequent turnover of trades.
7) Reinach v. Commissioner (1967): Option writer did not have to prove this
activity was a trade or business due to nature of instrument (options).
8) Purvis v. Commissioner (1976): Attorney denied status for not filing
Schedule C.
9) Marlowe King v. Commissioner (1978): Commodities Trader allowed to deduct
all expenses incurred with business of trading futures, even though some gains
were long term. Trader's business of trading futures was not even questioned
because of the nature of contracts.
10) Levin v. US (1979): A Trader is an active investor in that he does not
passively accumulate earnings, but rather manipulates his holdings. A
Trader's profits are derived through trading.
11) Moeller v. US (1983): Despite full time management of securities and large
investments, taxpayers were not Traders because their investments were long
term.
12) Ropfogel v. US (1991): US District Court (Kansas) determined criteria for
Trader Status is comprised of six factors.
13) Stephen A. Paoli (1991): Trading deemed not to be frequent, regular and
continuous. Credibility was the issue.
14) Frederick R. Mayer (1994): Trading advisors were objected to by IRS in
determination of Trader status — courts never rules on this issue. Trader
status denied because advisors were investors.
15) Rudolph Steffler (1995): Distinction made between business and activity
entered into for profit. Substantial member of trades was key issue.
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