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interest, or capital appreciation; Sec. 1091 wash-sale rules also apply to the day trader.
■ Engage in substantial activity; and He or she reports sales of securities on Schedule D,
■ Carry on the activity with continuity and Capital Gains and Losses, and on Form 8949, Sales
regularity (see IRS Publication 550, Invest- and Other Dispositions of Capital Assets, as appropriate.
ment Income and Expenses, p. 68 (rev. March 10, Although a day trader who qualifies as a trader in
2022)). securities is considered as being in the business of
If these requirements are not met, the indi- buying and selling securities, the trader is not subject
vidual will be considered an investor, not a trader to self-employment tax on gains and losses on his or
in securities whose trading activity is treated her sales of securities.
as a business. The determination of whether an A day trader who qualifies as a trader in securi-
individual is a trader in securities is based on ties is also allowed to deduct the expenses from his
the facts and circumstances of his or her trading or her trading activity as business expenses because
activity. Factors relevant in determining whether the trading activity is considered to be a business.
someone qualifies as a trader are discussed in Deductible expenses could include equipment costs
IRS Topic No. 429 and summarized in the table such as a computer or monitors, software for trading,
“Distinguishing Traders From Investors” below. education classes about trading strategies, and pos-
If a day trader who qualifies as a trader in securi- sibly even a home office deduction. These expenses
ties has not made the Sec. 475(f) election, the day are reported on Schedule C (Form 1040), Profit or
trader’s sales of securities result in capital gains and Loss From Business (Sole Proprietorship). Commissions
losses. Sales that yield long-term capital gains are and other costs of acquiring or disposing of securities
taxed at the preferential capital gains rates, but the aren’t deductible but must be used to figure gain or
Sec. 1211(b) limitations on capital losses and the loss upon disposition of the securities.

Distinguishing traders from investors

Relevant factors Explanation
Amount of time spent trading per day/week/month More time spent indicates trader; less time spent
indicates investor.
Typical holding periods for securities bought and Shorter time held leans to trader; longer time held
sold leans to investor.
Frequency and dollar amount of trades through the Larger amounts and more trades indicate trader;
year smaller amounts and fewer trades indicate investor.
Extent to which the activity produces income for If trading income is a taxpayer’s main source of
livelihood income, it is evidence of being a trader.
Seeking to profit from daily market movements, not Holding securities short term for shifts in the market
capital appreciation, dividends, or interest leans to trader status.
Activity substantial in comparison to your income If wages or ordinary income are lower than trading
income, it suggests a trader; if wages/ordinary
income are higher than trading income, it suggests
investor.
Carry on with the activity continuously and regularly Traders make multiple trades daily while investors
make infrequent trades.
Source: Joseph Hargadon, Irfan Safdar, Stephanie Wendling, and Eunbin Whang.

IN BRIEF market election. ■ The primary benefit of the mark-
■ To be eligible to make the mark-to- to-market election for a trader in
■ Clients who engage in day trading market election, a day trader must securities is that losses from his or
can benefit from a tax professional’s meet the requirements to be a trader in her trading activities are treated as
advice about the Sec. 475 mark-to- securities. ordinary losses.

To comment on this article or to suggest an idea for another article, contact Dave Strausfeld at David.Strausfeld@aicpa-cima.com.

38 | Journal of Accountancy June 2022