Trader status criteria

Discussion in 'Professional Trading' started by rimshaker, Feb 24, 2006.

  1. From everything I've read, it seems that to qualify for trader status in the eyes of the IRS, you pretty much have to be a manic daytrader with an itchy trigger finger. But my style of trading is longer term (several weeks, months, years). I may make around 40-60 trades per year.

    That's not a lot of trades, but that's all I need. But if i'm to make a living soley on speculation, I need those trader status benefits we all know and love or wish we had. How else can I go about convincing the IRS to treat me as a trader for tax purposes??
  2. Add another arrow to your quiver, specifically, a short term trading strategy that will help you qualify, and add a little bit to your pocket!
  3. i think it depends more on weather you have another job than exactly how many trades you make.
  4. Ebo


  5. Tax season always pisses me off.

    As the saying goes, "If you win, the government wins with you. If you lose, you lose alone."

    It's so infuriating! I want more than anything to live my dream of speculating for a living, but the tax treatments literally kick you to the ground. Trading in the late 1800's and early 1900's must've been a dream. No regulations... it was literally every man for himself and who could fool who first. I often wonder if Gould and Livermore would be just as successful in today's regulated markets.
  6. Ebo


    Why do I bother offering any help on this board?

    Tax season for me lasts one hour BSing with my CPA.
    I receive great joy counting my money, not stress.

    Why not "Shake your Rim" for extra off the books cash?
  7. think about what you are saying. in the 1800 and early 1900 there were no computers. it cost hundreds to make a trade. when i first started trading it cost over 100 to make a trade through ml. there has never been a cheaper time to trade.
  8. Ebo, thanks for the links.

    Trader tax status.... right now the IRS sees it as the number of trades you do for the year, not the quality of the trades or the cash amounts.

    I'm just wondering how long-term swing traders, who have no other jobs, qualify as a trader to the IRS.
  9. Ebo


    Why do you need to file as a "trader"?
    There are several other creative ways expense everything imaginable dude.

    An LLC can write checks and have a credit card to make "Business purchases".

    If you make REAL dough , offshore is another route.
  10. ess1096


    Here is some info I copied from the net.

    Mark-to-Market Accounting
    Information about the mark-to-market election for securities traders.

    Beginning in 1997, the tax law has permitted securities traders (as well as commodities dealers and traders) to elect a method of accounting called the mark-to-market method. Many securities traders will find this election attractive as a way to make filing simpler — and possibly reduce their taxes.

    Note: Commodity traders have special concerns that are not addressed in this guide.

    Mark-to-Market Election
    If you're a trader, you may choose whether or not to make the mark-to-market election. You don't automatically get mark-to-market treatment when you file as a trader. And you can't elect this treatment if you aren't a trader.
    The election has to be filed by the return due date — without extensions — for the year before the year you want the election to be effective. The last day to file the election for the year 2004 is April 15, 2004. For guidance on how to file the election, see the following pages.

    Consequences of the Election
    Marking to market. The most obvious consequence of the election is that at the end of each year you must mark your securities to market. What this means is you treat any stocks you hold at the end of the day on December 31 as if you sold them on that day for the current market value. If the stock has gone down, you get to report a loss without actually selling it. If the stock has gone up, you have to report that gain. Your basis for the stock is adjusted to reflect the gain or loss you report, so that you don't report the same gain or loss again when you actually sell the stock.
    For a true day trader, this aspect of the election is of no significance. You don't hold stocks at the end of the day, so you don't hold stocks at the end of the year. Your gains and losses are already in the book. This isn't true for a position trader (a trader who holds positions longer than a day trader). A position trader who makes the mark-to-market election loses the ability to do year-end tax planning by selling losers and holding winners.

    No wash sales. The wash sale rule doesn't apply to a trader who has made the mark-to-market election. There's a simple logic to this: if all your gains and losses are going to be flushed out on December 31, there's no reason for the tax law to be concerned about wash sales that may occur during the year.
    Wash sales can be a significant headache for a trader even if they don't affect the amount of tax the trader has to pay. If you make hundreds of trades in the same stock, many of the trades are likely to result in wash sales. At some point, accounting for all the wash sales becomes nearly impossible. Eliminating this concern is a significant benefit of the mark-to-market election.

    Ordinary income and loss. If you make the mark-to-market election, your trading gains and losses are converted to ordinary income and loss. You'll report the gains and losses on Form 4797 (sales of business property), not Schedule D (capital gains and losses).
    This does not mean that your trading gains are now subject to self-employment tax. In a 1998 tax law, Congress clarified that although your trading income becomes ordinary income, it is not self-employment income. This also means you can't use this income to support a contribution to an IRA or other retirement plan.
    Traders usually generate all or nearly all of their gains as short-term capital gains, which are taxed at the same rate as ordinary income. In most situations, changing to a system where the trader reports the gains as ordinary income will not have any tax cost. If the trader has capital losses from an investment that isn't part of the trading activity, though, the trader will lose the ability to offset those losses with capital gains from trading.
    For many traders, the flip side will be more important. Even good traders sometimes have losing years. When they do, the capital loss limitation rears its ugly head. A trader who has not made the mark-to-market election can deduct only $3,000 of net capital loss, with the excess loss carrying forward only, not back to earlier, profitable years. If you make the election, your trading loss isn't subject to this limitation, and can carry back as well as forward. The difference can be huge.

    You're Stuck With It
    Once you make the election, you have to continue to use the mark-to-market method for all future years. You can change the election only with the consent of the Internal Revenue Service, and they generally won't grant this consent if your reason for changing is simply that the election didn't turn out to your advantage. Be sure you know what you're doing before making the election.
    #10     Feb 25, 2006