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Trader Status

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Trader Status

 

Deductions for investment expenses like subscriptions and professional fees, office expenses, and investment interest, are restricted and limited, even for the most active investor. They’re deductible only if you itemize. They’re subject to the 2% floor on miscellaneous itemized deductions. But you can avoid these limits if you qualify as a “trader in securities.”

The tax code defines traders as “taxpayers who are in the business of actively buying, selling, or exchanging securities or commodities in the market.” There’s no pat formula to qualify. Instead, you’ll need to meet three “facts and circumstances” tests:

 

  • You trade full-time in lieu of a regular full-time job. In other words, trading is your job. You also need to keep control of your trades yourself. Don’t delegate full discretion to an outside money manager.
  • You establish a regular and continuous pattern of trading nearly every day the market is open. Generally, 200 trades or more should qualify. But you need to trade steadily throughout the year, not in occasional spurts.
  • Your intent is to profit from short-term market swings, not long-term gains or dividends. Most of your positions should last less than 30 days. (You can segregate long-term holdings to avoid disqualifying your trading activity.)

Once qualified, you’ll enjoy these benefits:

  • Trading gains and losses are still reported on Schedule D as capital gains and losses (unless you make a special election to treat them as ordinary income and loss).
  • Investment expenses are deductible as business expenses on Schedule C, whether you itemize or not.
  • You can deduct unlimited investment interest expenses.
  • You can deduct investment seminar expenses that aren’t deductible as ordinary investment expenses.
  • You can hire your spouse or children to work for the business and pay them tax-free employee benefits.
  • Trading income is not subject to self-employment tax.

 

 

 

 

 

 

 

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