If you engage in a great deal of short term trading (day trading and/or swing trading), you may qualify in the IRS's view to claim trader status on your tax return. By claiming trader status, you create more deductions on your tax return, potentially saving yourself thousands of dollars in taxes each year.
Are You A Trader?
The word trader has a special meaning in the tax law (IRS Topic 429). It refers to someone who trades to profit from daily market movements in prices of securities (not long term appreciation or dividends and interest). They trade with substantial volume and consistently over a long enough period of time. The biggest problem with trader status is the absence of a clear definition (the IRS gives us no numbers to go by). In fact, most of what is used to define trader status comes from the court cases over the years.
There are no precise standards telling us when traders are considered short term, or how large a volume you need, or how long a period you must continue the activity to be considered a trader.
Tax Benefits
If you qualify for trader status, you're likely to be able to claim more deductions than an investor. Some deductions that would be claimed as itemized deductions subject to various limits will be allowed as business deductions without those limits. There are even some deductions traders can claim that investors cannot!
For a sample list of Trader Tax Deductions click here.
One of the most beneficial aspects of trader tax status is the ability to claim mark to market accounting. If you make this election, your trading losses won't be subject to the $3000 capital loss limitation. Instead, your capital gains/losses are treated as ordinary gains/losses. Ordinary losses don't have a limit and can be used to offset any income. This is a huge benefit for a trader who has a bad year. For more information on the mark to market accounting method click here.
Filing As A Trader
The good news is there is no formal election to make to claim trader tax status. You'll place only your expenses on Schedule C (Income and Expenses from a Business). Your trading gains/losses will go on a Schedule D. This will look very strange to most tax professionals as they don't understand trader taxation rules but this is how it's done.
There are special forms to fill out by certain dates if you want to make the mark to market election.
We don't advise going it alone. If you make one mistake, the IRS can deny your trader tax status or mark to market election, costing you thousands of dollars in lost deductions.
Trader Tax Coach can help you with the following services: