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user2010
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Number of trades required to qualify as an active trader?

Is there a particular number of trades in stocks or similar securities required to qualify as a Trader, where expenses of the trading business are shown on Schedule C ? 
Once I do qualify as a Trader, what expenses can be shown that otherwise would not be eligible?

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Number of trades required to qualify as an active trader?

I'm not aware of any "number" of trades that would make put a person in the trade or business of securities for their own account.  Here is a link to some guidelines:

https://www.irs.gov/taxtopics/tc429.html

It is a high bar to be considered in the trade or business of dealing in securities for your own behalf.  Here is a case where the taxpayer was found NOT to be in the trade or business.  Read it and compare to your own circumstances

An investor was not a trader in securities because his trading activities did not have the frequency, continuity, and regularity to constitute a trade or business and the long holding periods showed that he was not seeking to profit from the swings in the daily market. Endicott v. Comm'r, T.C. Memo. 2013-199 (8/28/13).

There is no "bright line test"...so be informed and beware that it is a high hurdle to be considered in the trade or business of securities trader for your own account.



**Disclaimer: Effort has been made to offer correct information; but due to the discussion forum limitations, the poster disclaims any legal responsibility for the accuracy of the poster's response**

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6 Replies

Number of trades required to qualify as an active trader?

I'm not aware of any "number" of trades that would make put a person in the trade or business of securities for their own account.  Here is a link to some guidelines:

https://www.irs.gov/taxtopics/tc429.html

It is a high bar to be considered in the trade or business of dealing in securities for your own behalf.  Here is a case where the taxpayer was found NOT to be in the trade or business.  Read it and compare to your own circumstances

An investor was not a trader in securities because his trading activities did not have the frequency, continuity, and regularity to constitute a trade or business and the long holding periods showed that he was not seeking to profit from the swings in the daily market. Endicott v. Comm'r, T.C. Memo. 2013-199 (8/28/13).

There is no "bright line test"...so be informed and beware that it is a high hurdle to be considered in the trade or business of securities trader for your own account.



**Disclaimer: Effort has been made to offer correct information; but due to the discussion forum limitations, the poster disclaims any legal responsibility for the accuracy of the poster's response**
user2010
New Member

Number of trades required to qualify as an active trader?

The above is helpful and appreciated. I'm hoping to see an example of a case that shows where the line is drawn, on both sides of the line. (In Endicott expenses were denied. There's likely another case where expenses were approved.)  In other words, where an amount (6 figures) was allocated for active trading, and traded for profit, maybe sometimes with a gain, and other times with a loss. A trading business should have deductions for active research expense such as that conducted at a professional convention. That includes travel. I have done well in the stock market with information discovered at a convention 1000 miles away.  At the convention I see others who buy products at wholesale, sell them at a profit or loss, and deduct the convention expenses (among other expenses) on their taxes. I prefer trading stocks to buying and selling merchandise.

Number of trades required to qualify as an active trader?

I don't have the resources  to research court cases.  Visiting a professional tax advisor who has the ability to research and compare/contrast court cases and advise you on your particular circumstances is probably the best route to follow.

In the brief research I did, it would seem that the courts look to the trading of stocks as the source of income.  Holding stocks for appreciation and looking for any interest/dividend income appeared to be negative factors for trade or business activity and indicated activity of investor.

It appeared to me that full time trading;
looking for income based solely on very short time frame between buy/sell   sell/buy  and due solely to market fluctuations;
looking to the trading activity for sole source of income

were/are key factors for making the activity as a trade or business.

All though not directly applicable, the rules for 26 USC 183 and the regulations under Section 183 would appear to be useful to review and to help guide a trading activity from investor to trade or business.   Some of the factors are the same.  

However, there are a plethora of court cases under Section 183....and the decisions appear to be all over the spectrum.  Very, very much a facts and circumstances under Section 183.
**Disclaimer: Effort has been made to offer correct information; but due to the discussion forum limitations, the poster disclaims any legal responsibility for the accuracy of the poster's response**

Number of trades required to qualify as an active trader?

See also Nelson, T.C. Memo. 2013-259.    The cases also provide references to other cases you can look up.
**Disclaimer: Effort has been made to offer correct information; but due to the discussion forum limitations, the poster disclaims any legal responsibility for the accuracy of the poster's response**

Number of trades required to qualify as an active trader?

If someone is claiming active trader status, it helps to add foot notes to the return that explains that status is being claimed.

Does Turbo Tax have the ability to add free text / foot notes to the return.

 

I used a CPA earlier and he was able to put these foot notes earlier (using his professional tax prep software). 

But not sure if Turbo tax can do so. I would like to do my own taxes with turbo tax so need to ensure I can add the foot notes for this status.

 

Number of trades required to qualify as an active trader?

No ... you cannot add any kind of notes to the return when using a DIY program ... to attach them will require you to paper file the return. 

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