Designating yourself as a "trader" for tax purposes and designating yourself as an "investor" has separate implications when filing your tax return.
The IRS allows traders who qualify for "trader tax status" (and operate as a trading business) to choose a method of accounting called Mark-To-Market (MTM). Mark-To-Market is also known as Section 475(f) election. The MTM election isn't available to investors.
To qualify as a trader, you must:
- Trade substantially, regularly, frequently, and continuously, and
- Seek to profit from short-term security price swings.
When filing for Section 475(f) as a trader, consider the following:
- Traders have the option to use the Mark-to-Market rules, but it isn't required
- If you make an MTM election, then Form 4797 must be used to report gains/losses, and neither the limitations on capital losses nor the wash sale rules will apply
To qualify as an investor, you:
- Are an individual
- Buy and sell securities
- Hold securities for personal investment over a substantial period
- Demonstrate activity, which is intermittent and infrequent
- Report gains and losses on Form 8949 and Schedule D of Form 1040
- Are subject to the limits on claiming capital losses and wash sale rules