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 ~

Page 2

The courts have required evidence of:

Frequent, regular, and continuous trading activity (Preferably, daily and year round)
Substantial time and energy devoted to trading activity (Preferably, a full-time job)
Goal is to profit from short-term market fluctuations rather than from long-term gains or dividend income

Other considerations include:

Overall profitability of the activity after expenses
No other regular full-time job or profession
Eligible for trader status year after year

Additionally, the IRS will look for:

Daily record keeping activity
Independence in decision making and research activity
Minimal dividend or interest income from trading activity
High volume of transactions, i.e., number of shares traded, not dollar costs
Positions held for less than thirty days

In contrast, Investors focus on long-term capital appreciation and usually have another occupation or line of work. In general, a taxpayer who works a full-time job then trades stock before or after work will be classified as an Investor.

[See citations: Investor vs Trader References & Court Cases].

Carefully consider the circumstances of your client. To be treated as a trader, a taxpayer's trading activity must be regular, continuous, extensive and intended for short-swing gain. Certainly if the taxpayer's primary goal is holding investments for long-term appreciation, trader status does not apply. Unless taxpayers clearly meet the tests, they probably should be treated as investors. You might also discuss the hobby loss rules with your trader-client.

Note: Day Traders are allowed to hold stocks for the long term if they are held in a separate account and not day traded. The trader must tell the IRS these long term positions exist and they are not assets of a day-trading business.

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