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Non-Tech : Traders-Unlimited tax losses, unrealized -- Ignore unavailable to you. Want to Upgrade?

To: DD™ who wrote (5)	1/25/1998 11:10:00 PM
From: Robert A. Green, CPA	Respond to of 15

All taxable income and losses are net against each other to arrive at gross income, except that different types of income and losses are subject to special limitations in the tax code. "Investors" have "capital" gains and losses when they sell securities. "Traders" don't have capital gains and losses they have "ordinary" income or loss from selling securities. "Investors" are penalized under the tax code for no apparent reason. An investor can apply capital losses against capital gains but if their capital losses exceed their capital gains, they can only deduct $3,000 of net capital losses per year. They can carryforward the excess capital losses to the following years. "Investors" can only deduct margin interest expense as an itemized deduction limited to the amount of their investment income. Any excess also must be carryed forward. "Investors" can only deduct certain types of investment expenses and they are also limited as itemized deductions. All itemized deductions are subject to haircuts and other restraints on tax benefits for federal and many states. For an active trader who seriously is intent on earning a second part-time income from his or her trading activity, penalties for investor tax status simply are not fair or appropriate for them. "Traders" report their entire trading activity on Schedule C. Trading losses are unlimited, trading expenses are unlimited. No restrictions apply. Traders are not penalized under the tax code. Most active investors who could qualify as a trader don't know about this tax status, and they don't know the penalties an investor faces. An investor does get long-term capital gain treatment, but most traders are not forgoing that benefit because they don't hold positions for the long-term anyway. Traders segregate active short-term trading from their other "capital" investments in retirement plans and segregated long-term investment accounts (for which they retain the long-term tax rate benefit).