If you are an active trader, the IRS will provide you with some significant tax breaks, and special rules that can put more money into your account. But you have to first qualify as a trader in securities, otherwise, the IRS will treat you as an investor, and deny you all of the goodies available to day traders.
To be classified as a trader in securities, you must show that you are in the business of buying and selling securities for your account. You can show this by meeting certain conditions:
You must try to profit from daily price movements of securities rather than from interest, dividends, and capital appreciation
You must maintain substantial activity (usually taken to mean trading as a business daily, or at least a few times per week)
Your trading activity must be continuous, and regular (you can’t decide to trade now and then actively)
The IRS may challenge your status as a trader in securities by examining the facts, and circumstances including:
How long are the holding periods for the securities you buy and sell?
What’s the frequency and dollar amount of trading throughout the year?
How much do you pursue trading to make a living?
How much time do you devote to trading?
The correct answers to these questions are not set in stone, but Traders Accounting is very familiar with what the IRS wants and can give you expert guidance to prove you are a trader in securities. By the way, calling yourself a “day trader” won’t cut it – that term has no meaning to the IRS.
The areas of concern addressed on this page assume you are a trader in securities. Note that you may keep a separate portfolio that would be characterized as investments – that’s OK as long as you maintain monthly bookkeeping for the two.