Investing does not constitute a trade or business.   Whipple v Commissioner, 373 U.S. 193 (1963), 83 S Ct. 1168, 63-1 USTC p9466; Walters v Commissioner, TC Memo 1969-5, 28 TCM 22.

An investment club or partnership does not constitute a trade or business. Rev Rul 75-523.

The term trader is not defined in the Code or in any court decision.  In general, a trader is primarily interested in the gains derived from speculation rather than the income from interest, dividends, and long term-appreciation. King, 89 TX 445, 459 (1987).

But, investing in high-risk securities or securities that do not pay dividends is not enough. The taxpayer must prove that he or she is engaged in a trade or business and that the losses incurred are directly related to that trade or business. Levin 79-1 USTC 9331.

In determining whether taxpayers who manage their own investments are traders, “relevant considerations are the taxpayer's investment intent, the nature of the income to be derived from the activity, and the frequency, extent, and regularity of the taxpayer's securities transactions.” Moller v Commissioner, 721 F.2d 810, 813 (Fed Cir 1983), cert. denied, 467 U.S. 1251 (1984).

In King, supra, the court found that the taxpayer was engaged in a trade or business and noted that King's trading activity included 11,040 futures contracts one year and 6,711 contracts the next year. In O.L.Burnet, 118 F2d 659 (1937), the court held that the taxpayer who “bought stocks and commodities through a yearly average of 584 transactions involving thousands of dollars” was engaged in a trade or business.

However, even though Yaeger traded over one million shares in over 1,000 transactions and incurred margin debt of over $40 million, the court ruled that he was not a trader. Why? Because he (1) had less than 100 sales transactions in a year (and some of these were of stock purchased in prior years), (2) held the securities in anticipation of capital gain, and (3) received interest and dividends. Yaeger, 55 TCM 1101 (1988).

The Tax Court has held that the taxpayer must engage in the trading activity throughout the year ... Even though the taxpayer traded actively during certain periods of the year, the lack of activity during the other months negated his claim of trader status. Paoli, 62 TCM 275 (1991).

Investors are engaged in the production of income. Purvis v Commissioner, 530 F.2d 1332, 1334 (9th Cir.1976).

Traders are those “whose profits are derived from the 'direct management of purchasing and selling'.”  Moller, supra, at 813 (quoting Levin v United States, 597 F.2d 760, 765 (Ct. Cl. 1979)).

Investors derive profit from the interest, dividends, and capital appreciation of securities. See Moller, supra, at 813; Purvis, supra, at 1334; Liang v. Commissioner, 23 T.C. 1040, 1043 (1955).  They are “primarily interested in the long-term growth potential of their stocks”. Moller, supra, at 813.

Traders, however, buy and sell securities “with reasonable frequency in an endeavor to catch the swings in the daily market movements and profit thereby on a short term basis.” Purvis, supra, at 1334 (quoting Liang v. Commissioner 23 T.C. 1040, 1043 (1955).

In Mayer, 67 TCM 2949 (1994), the court scrutinized the average holding period of the taxpayer's stock. “We look at the two fundamental criteria that distinguish traders from investors: The length of the holding period and the source of the profit.” Approximately two-thirds of the petitioner's stocks sold within the years at issue were held more than 6 months, the lengthy holding periods of petitioner's stocks averaged approximately one year.  The court ruled that these holding periods belie any effort to capitalize on daily or short term swings in the market.

In another case the court focused on holding periods of greater than six months.  It ruled that the taxpayer was an investor rather than a trader because 31 of his 75 sales of securities were of stock held more than six months.  Purvis, 37 AFTR 2d 76-968, affr. 76-1 USTC 9270.