SE tax and trader status

[TBTesser <TBTesser@xxxxxxx>]

Question:

So, if I understand what you are saying, your interpretation is that the IRS
has TWO "trader" classifications. The only real difference being the location
of where you trade. The trader who incurs the expense of buying or leasing a
seat so that he can trade solely for himself in the pit is automatically
classified as a "professional trader" and therefore is subject to one set of
rules. However, the trader who may incur many more expenses such as leasing an
office, paying for software, paying for a datafeed, paying for computers, etc.
so that he can trade off-the-floor, will simply be classified as a "trader"
and will NOT be considered a professional and is subject to a different set of
rules.

Answer:

I think you are getting too caught up in the semantics.  I'm not sure whether
the IRS considers any one type of trader a "professional" or not ( although I
may have used these terms to distinguish the two different treatments from an
SE vantage point).  In fact, most IRS agents are not at all familiar with the
Trader Status at all.  
It is the Specialized Financial Products Division which deals  with how to
file the Trader classifications, and several officials in the know have given
me their interpretation of a law which is quite complex.  There is nothing in
the IRC which tells you exactly how to handle this.  In their opinion, the
only time an Trader is required to calculate SE tax on Capital gain income is
when he or she trades from the floor (either owning or leasing a seat).
The other issue is what do you do with the mark to market election (Section
475) which is new this year to traders.  This transforms the income (or loss)
from capital to ordinary - putting it in the same category as other ordinary
business income.  There was no obvious answer to this until HR2645 (the
technical corrections bill) came out of the House Ways and Means Committee a
few months ago.  This bill has still not been passed by the entire Congress,
although it probably will be.
It is significant, however, that in this bill, they tell us that even though
the income is now ordinary, they will not subject it to SE tax, just because
it is now ordinary. You are right, this stuff is amazing!