Learn about investing, trading, retirement, banking, personal finance and more.
If you buy and sell securities, you may qualify for tax status as a ‘trader,’ which importantly may qualify you for certain business tax breaks. The rules governing this status can be confusing, however, making it difficult to determine whether you qualify as a trader, investor, or dealer. Let’s take a closer look at the qualifications for traders as defined by the IRS, as well as how to report income and expenses if qualified.
The IRS defines a trader in securities by three conditions: someone who “[seeks] to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation”; they must display “substantial” trading activity; and they “must carry on the activity with continuity and regularity.” They recommend individuals unsure of their status take into account “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.”
Key to qualifying as a trader is conducting trading activities as a business pursuit, rather than doing so to hold as personal investments, or to earn income from “dividends, interest, or capital appreciation.” Traders are responsible for “[keeping] detailed records” that distinguish which holdings are a part of the trading business rather than investment holdings; securities must be identified as such from the time of acquisition.
Qualifying traders can report business expenses via IRS Form 1040, Schedule C. Commissions and other auxiliary costs relating to trading securities “aren't deductible but must be used to figure gain or loss upon disposition of the securities.” Traders are not required to pay self-employment tax on gains and losses from selling securities.
Another key distinction for traders comes from the use of mark-to-market rules. First, traders must elect to change to mark-to-market accounting via Revenue Procedure 2018-31. Doing so allows traders to make “timely mark-to-market [elections]” by “the original due date… of the tax return for the year prior to the year for which the election becomes effective,” and treat gains and losses upon selling securities “as ordinary gains and losses” using Part II of Form 4797, Sales of Business Property. They must also file Form 3115, Application for Change in Accounting Method, though failure to file this will not “invalidate a timely and valid election.” Traders who decide to no longer use mark-to-market accounting can “file an automatic request for revocation under Revenue Procedure 2018-31, Section 24.02.”
Want to invest and/or diversify your portfolio but unsure where to start? Artificial Intelligence can help! Tickeron has developed user-friendly Artificial Intelligence tools to help new and experienced investors generate investment ideas. Tickeron’s A.I. is capable of evaluating a portfolio and providing a “Diversification Score,” to tell the user how well-diversified their portfolio is. It can also generate investment ideas for a user’s 401(k) plan – even if you’re just getting started! The A.I. will give you ideas based on your risk tolerance, investment objectives, and the investment options available.
Tickeron’s new financial website is available to beginners, intermediate investors, and even experts and advisors. Explore tickeron.com today.
Explore the basics of mutual funds, a key investment vehicle. Learn about the types, benefits, strategies, and fee structures. Understand how mutual funds fit into portfolio diversification and retirement planning. Ideal for beginners and seasoned investors alike
Learn about the Simplified Employee Pension (SEP) IRA, its eligibility criteria, and the benefits it offers to your business. Discover how a SEP IRA can provide tax advantages, simplicity, and contribute to employee retention and financial security
Explore the concept of Discounted Cash Flow (DCF), a powerful valuation tool in finance. Learn how it uses future cash flow estimates and a discount rate to calculate present value, reflecting the Time Value of Money. Understand its origins, limitations in investment decision-making
Dive into the concept of accommodative monetary policy, a tool used by central banks to stimulate economic growth. Learn how it influences interest rates, liquidity, and the overall economy, and explore its benefits, challenges, and real-world applications
Discover the power of earnings momentum as a robust financial indicator. Understand how it gauges a company's trajectory, aiding investors in spotting emerging trends and making informed decisions in volatile markets. Combine it with other tools for comprehensive analysis.
Explore the 1031 exchange, a tax-deferring tool for real estate investors. Dive into its rules, benefits, and when to use it for optimal investment growth.
Unveil the intricacies of margin calls, their triggers, and how to meet them effectively, with insightful examples. Learn essential strategies to avoid risks in margin trading, covering management techniques, market volatility, and the impact of margin debt.
Dive into the S&P/TSX Composite Index, a cornerstone of Canada's financial landscape. Learn about its composition, investment avenues, and historical evolution. Uncover opportunities to bolster your financial strategy with this vital Canadian economic indicator.
Unveil the key players in wheat production and refining like Cosan, Adecoagro, Bunge. Dive into their impact on food security, sustainability efforts, and their strategic market positions, offering a lens on investment prospects in the vital agricultural sector.
Explore the significance of the dry bulk shipping sector, market capitalization trends, and investment strategies. Learn how global factors impact this industry and make informed investment decisions