The Good News: If you meet the IRS's definition of a "Trader", you can save big bucks come tax time. Not so fast!...The IRS draws specific distinctions between and "Investor" and a "Trader".

How to Qualify as a "Trader" 
To determine if you qualify as a "Trader" versus an "Investor", we can only follow the guidelines determined by several court cases addressing this issue.  

SmartMoney states, "The court says you are a trader if:

• You spend more than 20 hours a week trading. Preferably, you don't have a regular full-time job.
• You have established a regular and continuous pattern of making lots of trades (several almost every day the markets are open).
• Your goal is to profit from short-term market swings rather than from long-term gains or dividend income. What is profiting from short-term market swings? Getting in and out of a position on the same day or within a week. Holding stocks for a month or two blows any chance of claiming trader status.
• You don't use the Small Order Execution System (SOES) for your trades. Only amateur investors are allowed to use SOES...by using SOES you would be telling the SEC you are an amateur while trying to tell the IRS you are a pro trader.
• Satisfy the above requirements for an unbroken string of at least six months.

Benefits of "Trader" Status

• Deduct all your investing expenses on Schedule C, like any other sole proprietor. This eliminates the need to claim these expenses on Schedule A and eliminates the limitation of only writing off the amount that exceeds 2% of your gross income. Furthermore, Schedule C write-offs reduce your adjusted gross income, which makes it more likely that you can fully deduct all your personal exemptions.
• Deduct your margin account interest on Schedule C.
• Write-off up to $25,000 a year for equipment used in your trading activities (computers, magazines, Bloomberg, fax machines, office material) under Section 179.
• Exempt yourself from all wash-sale rules (See Wash-Sales for more info.)
• Deduct an unlimited amount of losses versus the investor's limit of $3,000 in capital losses."

Is it possible to qualify as both a "Trader" and an "Investor?"
Yes! However, you must handle your "Trader" investments differently than your "Investor" investments.

IT'S TAX TIME!

In order to treat investments differently, you must separate your long-term holdings (Investor Status) from short-term holdings (Trader Status) by identifying them as such in your records on the day you buy the holding. It would help your claim as both Trader and Investor status if you actually created a separate account. That is, a trader account and an investor account. 

Please consult your tax advisor for details on filing Schedule D and C under "Trader" status and the IRS Revenue Procedure 99-17 at the IRS website, or go to Tax Forms to download the latest IRS tax forms. The information provided above is intended as a preliminary status check, not the bible in Tax Law.

Presentation Matters

One final note to remember when filing your tax return: be sure to provide accurate backup documentation of your trading records. This will minimize the chances of an audit on your return. Also, be sure to include backup confirmations from your broker on all specific lot transactions with your tax return.

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