Qualifying for Trader Tax Status
I have been getting a lot of questions lately about how someone would qualify for trader tax status. I have written about this topic before but I thought I'd quickly review what the IRS specifically looks at when determining whether to tax someone as a trader or whether to tax them as an investor.
In order to qualify for trader tax status (and the tax deductions that go with it) there are 3 very specific things that the IRS will look for:
The IRS does not want to see large gaps in your trading during the year. They want to see trades that are spread evenly through out the year and not clumped together in a one or two month period. I've seen trader status get revoked (trader gets reclassified as an investor and taxed as such) because most of the trades happened in a 3 or 4 month window and very little activity occured the rest of the year.
Consistency does not mean that you cannot take some time off for a vacation or similar event. Every business owner will experience interruptions during the year. However, your trading should be congruous throughout the year.
2. SIGNIFICANT VOLUME
The IRS is looking for significant volume in your trading. Although the IRS doesn't give out a hard number to shoot for, we can get an idea as to the amount of trades you should have from past trader tax court cases. Generally speaking, you should have at least 500+ trades for the year. If you are trading around 100 to 200 times a year, you'll probably have a tough time convincing the IRS that you qualify for trader status.
3. SHORT TERM TRADING
The IRS does not want to see a lot of long term capital gains from someone claiming trader status. The majority of your trading gains should be short term. You should be looking to take advantage of short term market moves and not from long term appreciation. Yes, there are court cases where the person lost trader status because 90 to 95% of the trading was positions held longer than a year. Most of you should have no problem with this requirement.
These are the three primary things that the IRS looks for: consistency, volume, and short term trading. If you meet these requirements, you can file your taxes as a trader in securities and deduct all of your trading related expenses. There is no form to fill out to declare yourself as a trader in securities, just meet the requirements that I've listed here and you are good to go. Keep in mind, that if you have met these requirements in the past 2 years but have not filed your tax return with trader status, you can amend the past 2 years and claim your expenses to get additional refunds from the IRS.
Please contact my office if you have further questions regarding trader tax status and whether you qualify or not. I can be reached at 813-746-8208 or by email at firstname.lastname@example.org.
Steve Ribble | 03/28/2013