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Traders in Securities

Most taxpayers’ net long-term and short-term capital losses are limited to $3,000 per year. Also, most taxpayers can no longer deduct investment expenses and can only deduct margin or investment interest to the extent of investment income. On the other hand, taxpayers who are “traders in securities” and qualify for the trader tax status can benefit from various tax advantages.

Do you seek to profit from daily market movements? Is your trading activity substantial? Do you carry that activity with continuity and regularity? Filing your taxes as a trader in securities can be rewarding if you can meet the requirements.

According to the IRS, the following facts and circumstances should be considered in determining if your activity is a securities trading business and qualifies for the trader tax status:

  1. Typical holding periods for securities bought and sold;
  2. The frequency and dollar amount of your trades during the year;
  3. The extent to which you pursue the activity to produce income for a livelihood; and
  4. The amount of time you devote to the activity.

 

Some of the tax benefits of the trader tax status include:

  1. Investment expenses, including software and subscriptions, can be deducted and are not added back for AMT purposes.
  2. Margin or investment interest associated with the trading activity is fully deductible and not subject to any interest deduction limitations.
  3. The home office deduction can offset income from the trading activity if a space in the taxpayer’s home is exclusively dedicated to the trading activity.
  4. Income from the trading activity is not subject to self-employment tax.
  5. Ability to elect to expense certain depreciable assets used predominantly in the trading activity.
  6. Ability to make the Mark-to-Market election, which:

    • Converts short-term capital gains or losses to ordinary income or loss, eliminating the $3,000 limit for net capital losses.
    • Eliminates wash sale rules, which generally apply to prevent loss deductions on “substantially identical” securities purchased within 30 days before or after a sale.
    • Allows the taxpayer to segregate trader transactions from investor transactions to preserve the possibility of long-term capital gain treatment for certain securities.

The tax professionals at KROST can help you determine if you qualify for the trader tax status, and if you do, ensure that you take advantage of all beneficial tax positions that are available.