From IRS PUB 550
Special Rules for
Traders in Securities
or Commodities
Special rules apply if you are a trader in securities or commodities in the business of buying
and selling securities or commodities for your
own account. To be engaged in business as a
trader in securities or commodities, you must
meet all the following conditions.
• You must seek to profit from daily market
movements in the prices of securities or
commodities and not from dividends, interest, or capital appreciation.
• Your activity must be substantial.
• You must carry on the activity with continuity and regularity.
The following facts and circumstances
should be considered in determining if your activity is a securities or commodities trading business.
• Typical holding periods for securities or
commodities 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.
If your trading activities do not meet the
above definition of 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.”
How To Report
Transactions from trading activities result in capital gains and losses (unless a Trader makes a section
475(f) election) and must be reported on Form 8949 and Schedule D (Form
1040), as appropriate. Losses from these transactions are subject to the limit on capital losses
and the wash sale rules.
if you qualify as a trader you can make the Mark-to-market election (not required). If you made
the section 475(f) mark-to-market election, you should report all gains and losses from trading
as ordinary gains and losses in Part II of Form 4797, instead of as capital gains and losses on
Form 8949 and Schedule D (Form 1040). Also, the wash sale rules do not apply. In that case, securities or commodities (depending upon which election was made) held at the end of the year in your business as a trader are marked to market by treating them as if they were sold for fair market value on the last business day of the year and gain or loss is recognized. But you do not mark-to-market any securities or commodities you held for investment. Report sales from those securities or commodities on
Form 8949 and Schedule D (Form 1040), as appropriate, not Form 4797.
Note. You may be a trader in some securities or commodities and have some securities
or commodities that are not held in connection with your activities as a trader, such as those
held for investment. The special rules for marking to market discussed here do not apply to the
securities or commodities held for investment. You must keep detailed records to distinguish
those securities or commodities. The securities or commodities held for investment must be
identified as such in your records on the day you acquired them (for example, by holding
them in a separate brokerage account) specifically identified under section 475.
Expenses. Interest expense and other investment expenses that an investor would deduct
on Schedule A (Form 1040) are deducted by a
trader on Schedule C (Form 1040), Profit or
Loss From Business, if the expenses are from
the trading business. Commissions and other
costs of acquiring or disposing of securities or
commodities (depending upon which election
was made) are not deductible but must be used
to figure gain or loss. The limit on investment interest expense, which applies to investors,
does not apply to interest paid or incurred in a
trading business.
Self-employment tax. Gains and losses from
selling securities or commodities as a trader are
not subject to self-employment tax. This is true
whether the election is made or not.
note that form 3115 is not required if the 475(f) election is made for the trader's first year of business. REV PROC 2023-24
