If you are an active trader, the IRS will provide you with a number of important tax breaks and special rules that can put more money into your account. But you have to first qualify as a “trader in securities,” otherwise, the IRS will treat you as an “investor” and deny you all of the goodies available to traders.
To be classified as a trader in securities, you must show that you are in the business of buying and selling securities for your own account. You can show this by meeting certain conditions:
You must try to profit from daily price movements of securities rather than from interest, dividends and capital appreciation.
You must maintain substantial activity (usually taken to mean trading daily, or at least a few times per week)
Your trading activity must be continuous and regular (you can’t decide to actively trade every now and then).
The IRS may challenge your status as a trader in securities by examining certain facts and circumstances, including:
How long are the holding periods for the securities you buy and sell?
What is the frequency and dollar amount of trading throughout the year?
How much do you pursue trading in order to make a living?
How much time do you devote to trading?
The correct answers to these questions are not engraved in stone, but Traders Accounting is very familiar with what the IRS wants and can give you expert guidance to prove you are a trader in securities. By the way, calling yourself a “day trader” won’t cut it – that term really has no meaning to the IRS.
The areas of concern addressed on this page assume you are a trader in securities. Note that you may keep a separate portfolio that would be characterized as investments – that’s OK as long as you maintain separate bookkeeping for the two.