Trade Tax Questions
Mar 14, 2016
By: M. Slabinski
It’s tax season. And there are some particular IRS rules regarding taxes and trading. We’re not tax accountants, but we want you to make smart choices about your taxes just like you make smart choices about your trades. This article will help you ask your accountant the right questions to make the process easier.
Are you an INVESTOR or a TRADER in the eyes of the IRS?
This is an important distinction because of how losses and other expenses can be deducted from your ordinary income. Typically, investors are limited to the losses they can take in a year and can’t deduct trading expenses. Traders have fewer limits on deducting losses and trading expenses. But the IRS considers you a trader according to strict rules. Just calling yourself a trader or being “active” isn’t enough. IRS Topic 429, https://www.irs.gov/taxtopics/tc429.html covers Investor or Traders status.
o Investor - IRS Definition:
o Trader (“Business”) – IRS Definition:
o Holding period of your positions
o Frequency & dollar amount of your trades
o Expectation of making a living off of your trading
o Amount of time you spend trading
So, just because you’re a tastytrader, selling options and spreads and buying them back on a regular basis, the IRS doesn’t necessarily consider you a trader for tax purposes. The IRS says, “If the nature of your trading activities does not qualify as a business, you are considered an investor and not a trader. It does not matter whether you call yourself a trader or a day trader, you are an investor.”
The real question is, then, does your trading qualify as a business? Unfortunately, the IRS doesn’t give you any parameters to make that decision. There are no set dollar amounts. No minimum number of trades. But from our experience, here are some thoughts to guide you:
If you think you might qualify for trading status, here are some of the reporting requirements around calling it a business.
If you don’t qualify as a trader, these are the reporting requirements.
o Investor Forms & Items to Note:
The bottom line is that it’s not easy to be considered a trader in the eyes of the IRS. Even if you are, there are benefits and pitfalls. Discuss these with your tax professional. But hey, no matter what the IRS calls you or how you’re taxed, you’ll always be a tastytrader!
Read more about trader tax questions here and watch our shows on tastytrade.com. Stay tasty, my friends!
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
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