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Do You Qualify as a Trader in Securities?

TradingPub Admin | August 30, 2012

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One of the good thing about paying taxes is the fact that it means you made money.  Our goal each year is to pay more and more taxes.  Having said that, many times our patrons ask questions about taxes and since we simply own the Pub and are not a tax firm, we are not able to answer.  Enter new TradingPub Contributor, Steve Ribble.  Steve is a tax expert and has agreed to share a few posts over the next few months regarding taxes and trading.  Thanks to Steve Ribble for the following guest post:

You don’t have to be a pit trader or own a seat on the exchange to qualify as a trader in securities. However, there are certain requirements that the IRS looks for in determining if you’ll qualify as a securities trader. Meet these requirements and you’ll reap the favorable tax benefits of trader status. Miss any one of the following requirements and the IRS will likely deny your trader status, costing you thousands of dollars in lost tax deductions.

So what exactly does the IRS look for in determining if you meet trader status? Unfortunately there is no clear definition of how to qualify for trader status. Just like the “Pirate Code” in the movie Pirates of the Caribbean, there aren’t rules but more like guidelines on how to qualify. According to IRS Topic 429, to qualify as a trader in securities you must:

  1. Seek to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation
  2. Your activity must be substantial
  3. You must carry on your activity with continuity and regularity

As you can see, the IRS does not clearly define what level your trading needs to be at in order to qualify for trader status (guidelines not rules). Fortunately, we’ve been able to gather what the IRS specifically looks for from the trader tax court cases over the years. These are the 5 Golden Rules of Trader Status:

  1. Short holding periods (intraday or daily is the best)
  2. Frequency of your trades (high frequency and continuous through out the year with NO LAPSES in your trading)
  3. Dollar amount (significant portion of your liquid net worth tied up in trading)
  4. Extent that you trade to produce income for a living (run it like a business)
  5. Amount of time you spend trading or studying the markets (4-6 hours a day at a minimum)

Follow the above rules and you shouldn’t have to worry about whether you qualify for trader status. If you are still not certain, fill out our free Trader Status Evaluation form and we will help you determine if you meet the requirements.

In my next article, I’ll discuss the tax advantages of trader status and how it can save you thousands of dollars every year in taxes.

Steve Ribble is CEO of Shrink My Taxes, LLC, a full service accounting firm specializing in trader taxation. He works with hundreds of traders around theU.S., helping them proactively shrink their taxes. Steve is also a much in demand speaker on the subject of trader taxation. He can be reached at info@ShrinkMyTaxes.com.

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Cheers,

The TradingPub
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Risk Disclaimer: Past performance is not indicative of future results. Futures trading involves substantial financial risk. Views of guest commentators do not represent those of TradingPub.com. Article intended for educational purposes only and not meant in anyway as a solicitation to buy or sell certain securities. Please consult your personal financial adviser before using this information for your own trading purposes.