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Strategies & Market Trends : The Final Frontier - Online Remote Trading -- Ignore unavailable to you. Want to Upgrade?

To: steve goldman who wrote (3356)	3/12/1998 11:38:00 AM
From: Robert A. Green, CPA	Read Replies (1) \| Respond to of 12617

Answer for Steve about trader tax rules. Based on your post, I believe you are in the trading business for yourself in addition to being an employee in a related business. Yes, I believe you can report your taxes as a trader and deduct unlimited realized and unrealized market losses at 12/31/97 as well as all your trading expenses. I have written a special 20-page tax guide for traders. It includes tax research on the subject ("trader in securities"), as well as my conclusions, suggestions and some misconceptions. I put an excerpt of the research in the guide below that should answer your questions about numbers of trades, etc. There are no set numbers required. If you want to order the entire guide for email or mail delivery the cost is $25. Send a check to Green & Company, Inc., 415 East 37th Street, New York, NY 10016. Guide Excerpt Whether a taxpayer's investment activities are sufficient to constitute carrying on a trade or business requires an examination of the facts in each case. In determining whether a taxpayer who manages his own investments is a trader, who is engaged in a trade or business, or an investor, who is not, courts consider the following factors: . . . the taxpayer's investment intent; . . . the nature of the income to be derived from the activity; and . . . the frequency, extent, and regularity of the taxpayer's securities transactions An individual whose sole source of income in the tax year was derived from dividends and interest was held not to be engaged in any trade or business. According to the Tax Court, the distinction between a trader and an investor is that a trader buys and sells securities with frequently in an effort to catch the swings in the daily market movements and thus profit on a short-term basis. On the other hand, an investor purchases securities to be held for capital appreciation and income, usually without regard to short-term developments that would influence the price of the securities on the daily market. The Second Circuit similarly says that the two fundamental criteria that distinguish traders from investors are the length of the holding period of the securities and the source of the profit. Traders buy and sell securities to profit on a short-term basis, while investors derive profit from the interest, dividends and capital appreciation. The Federal Circuit also says that in order to be a trader, a taxpayer's activities must be directed to short-term trading, not the long-term holding of investments, and income must be principally derived from the sale of securities rather than from dividends and interest paid on those securities. In Kales, the Sixth Circuit held that a taxpayer was engaged in the trade or business of managing her own investments because her management activities were extensive, varied, continuous and regular. However, in a later case, the Sixth Circuit recognized that Kales was disapproved by the Supreme Court in Higgins (see 25,609) where a private investor engaged in comparable activities was held not to be carrying on a business. Considering the extensive case law on the issue of whether a taxpayer who manages his own investments is a trader, the Tax Court has developed a two-part test that must be satisfied in order for a taxpayer to be a trader. It holds that a taxpayer's activities constitute the trade or business of trading only where both of the following are true: 1 the taxpayer's trading is substantial (i.e., sporadic trading will not constitute a trade or business), and 2 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. 8 observation: A trader's investment related expenses are deductible in arriving at adjusted gross income, whereas an investor's expenses are deductible only as miscellaneous itemized deductions as Code Sec. 212 expenses for the production or collection of income, and thus are subject to the 2% floor on miscellaneous itemized deductions ( 56,163). In addition, the investment interest limitation rules of Code Sec. 163(d) don't apply in the case of interest on debt incurred by a trader where the proceeds are used to purchase or carry investments used in the trade or business. rgreen@greencompany.com greencompany.com