Special rules apply if you're a trader in securities, in the business of buying and selling securities for your own account. The law considers this to be a business, even though a trader doesn't maintain an inventory and doesn't have customers. To be engaged in business as a trader in securities, 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; and
- 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 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; and
- The amount of time you devote to the activity.
If the nature of your trading activities doesn't qualify as a business, you're considered an investor and not a trader. It doesn't matter whether you call yourself a trader or a day trader, you're an investor. A taxpayer may be a trader in some securities and may hold other securities for investment. The special rules for traders don't apply to those securities held for investment.
A trader must 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 he or she acquires 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. See Topic No. 703, Basis of Assets. Gains and losses from selling securities from being a trader aren't subject to self-employment tax.
As a trader, without the MtM accounting, your gains/losses from securities trading are still considered capital gains and capital losses and consequently get reported on Schedule D and/or Form 8949 if required. Those gains and losses are subject to the same rules as capital gains and capital losses. You are correct that your trading losses offset your trading gains plus $3,000 of ordinary income. Traders, even though they are engaged in a business, do not pay self-employment tax.
Your Schedule C will only include your trader business expenses, such as internet, office rent if you have an office, and other expenses related to your business as a trader. Thus, it is entirely expected that a trader in securities with no MtM accounting status to have a Schedule C with no profit just losses.
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