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What is a ‘trader’ of securities and how do I qualify for it?

The nature of your trading activities must qualify as a business (even though a trader doesn’t maintain an inventory and doesn’t have customers) for you to be considered a trader. You must meet all of the following conditions:

  • You must seek to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation
  • Your activity must be substantial
  • You must carry on the activity with continuity and regularity

Because there can be tax advantages to declaring that you are a ‘trader” instead of an ‘investor’, the IRS will consider the following to determine if your activity is considered a securities trading business:

  • Typical holding periods for securities bought and sold
  • The frequency and dollar amount of your trades during the year
  • The extent to which you pursue the activity to produce income for a livelihood 
  • The amount of time you devote to the activity

A ‘trader’ must also keep detailed records to distinguish the securities held for investment from the securities in the trading business. The securities held for investment must be identified as such in the trader's records on the day they acquire them (for example, by holding them in a separate brokerage account).

Traders report their business expenses on Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship). Commissions and other costs of acquiring or disposing of securities aren't deductible, but must be used to figure gain or loss upon disposition of the securities. Gains and losses from selling securities from being a trader aren't subject to self-employment tax.

Like traders, investors may use the commissions and costs of acquiring and disposing of securities in the gain/loss calculation. But, other expenses (except for interest expense in certain cases) related to investing are not deductible.

Investors use Schedule D and Form 8979 to report the sales of securities.

Similarly, traders can also use Schedule D and Form 8949 to report the sales of securities. If doing so, they’re subject to the same limitations for claiming capital losses and the wash sales rules that are imposed on investors.

However, traders have another alternative. If they have made the proper Mark-to-Market or Section 475(f) election with the IRS, then they may use Form 4797 to report the sales of their securities without the loss limitations and wash sale rules.

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