Do you know what constitutes a trader in securities as opposed to an investor?
The IRS has not specifically defined what characteristics determine a
trader in securities or commodities from an investor. All we have are court cases decided
before everyone had access to buying and selling securities through the
internet. Obviously, if you trade daily
at a firm that specifically caters to professional traders, you are in the business of
buying and selling stocks for a profit.
The Tax Court has developed a two-part test that must be satisfied in order for a taxpayer to be a trader in securities. The trader's activities rise to the level of a "business" only where both of the following are true:
- The taxpayer's trading is substantial (frequent, regular, and continuous), and
- The taxpayer seeks to catch the swings in the daily market movements, and to profit from these short-term changes, rather than to profit from long-term holding of investments.
Your answers to the following questions may determine if you are a "trader" or
"investor."
- Do you purchase and resell property for your own account? You must do the trading yourself. You cannot hire someone to do it for you.
- Do you spend lots of time researching and executing your trades?
- Can you demonstrate a regular and continuous pattern of a buy and related sale for every day the market is open?
- Are you strictly playing short-term positions? Is your income mostly from gains and losses?
- Do you have substantial amounts of interest and dividends? These indicate a long-term investment.
- Did you actually make money after all deductible expenses? It's not something you do at lunch or in your spare time.
- Do you have another regular full-time or part-time job or profession?