Page 2 ~ Is Your Client an INVESTOR? a TRADER? or a MARK-TO-MARKET TRADER?

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About the author: NANCY E GOEDECKE, EA

Nancy E Goedecke, EA is a full-time practicing Enrolled Agent specializing in individual and small business taxation. She is an experienced teacher and a frequent presenter of income tax seminars for professionals across the country.

Nancy is known for her ability to make comprehensive tax issues understandable and applicable in daily practice of attendees. She became an EA and joined NAEA in 1986, is a Fellow of the National Tax Practice Institute and currently serves as Secretary of NAEA. She is also a member of the Internal Revenue Service Advisory Council (IRSAC) which meets at the national office of IRS with Commissioner Rossotti and his staff.

She is a Past President of the Massachusetts Society of Enrolled Agents and recipient of the 1989 "Enrolled Agent of the Year" award. As owner of Taxes & Money Management in Hudson, MA, Nancy is also a Registered Representative / Advisory Representative orchestrating comprehensive financial solutions to her clients.

Is Your Client an INVESTOR? a TRADER? or a MARK-TO-MARKET TRADER?
~ by Nancy E Goedecke, EA ~

The Internet has spawned a new breed of investors who use their computers to execute stock trades on a daily basis. Suddenly everyone and their cousin is either an online day trader or thinking about becoming one. Even the more laid back investors who used to buy and hold are racing to open online trading accounts so they can get in on the action.

It's fun, it can be profitable and it is interactive. Day trading is rapidly becoming a potential new national pastime. Seeking to meet their customer needs, a large discount department store recently announced that they are providing space for e-trade centers and/or brokers to operate.

Most day traders hold their positions just a few hours or days, looking for a quick profit on minor price fluctuations. At the end of the year they may have scores or even hundreds of stock market transactions to report on their tax returns. Our practice saw a dramatic increase in the number of clients who had embraced online trading and, in turn, created EA angst by the exponential increase in the number of Schedule D line entries required to report their activity.

Active investors may find some special strategies to reduce their tax bills if they can qualify as traders, who are taxed differently from investors and dealers.

Traders can deduct 100% of their investment related expenses on Schedule C, while investors are limited and subject to the 2% of AGI haircut as miscellaneous itemized deductions on Schedule A.

The tax issue is whether the person is actually in the business of trading stocks --

between the two. Most individuals, even those who trade several times a week, are, by the IRS' interpretation, investors.

IRS regulations are yet to be promulgated and the court cases dealing with this issue are pre-Internet online trading activities. Nonetheless, the only way we have to define the status is to go by the guidelines laid out in several court cases that have addressed the question.

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