You mean it puts traders at a disadvantage. Long term capital gains tax (1> year held) is 15% capped. Short term capital gains tax, depending on if you trade futures, can range between 20-35%.
I mean it puts investors at a disadvantage or the investors would not be seeking the trader tax status. Tax cap is insignificant compared to a complete inability to write off your losses while at the same time paying taxes on profits. Do you have trader tax status with MTM selection?
Interesting article... couple of questions to anyone who can help: 1. The language used by the IRS to define Trader seems too vague to me, could someone translate what exactly "substantial activity" means in terms of number of trades and capital rquired to meet Active Trader status? 2. Can I elect MTM, even if I don't meet the "substantial activity" requirement? TIA
The IRS makes it vague because the whole issue is up in the air, there is no guidance in the statutes, and court decisions are all over the place. In case you are not aware, the IRS does not make policy, they just try to administer the law from statute, common law, and court guidance, which they attempt to summarize for you. So the IRS has little more of a clue than anyone else what the courts are going to hold in a given case. They do the best they can by using vague language in their "criteria" and trying to see where a given case seems to fall on a case by case basis. The answer to question 2 is no.
thanks comintel... it seems like incorporating or forming a hedge fund might be a way around the issue. Also, I googled and found the following article that provides some general guidelines, a bit more concrete than the IRS: http://www.protradertax.com/public/page/part-time-traders a lot of us option traders that take time to capture the theta decay are getting screwed with these rules.