J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

30.16 Trader, Dealer, or Investor?

The tax law recognizes three types of individuals who may sell and buy securities. They are:

Investor. You are an investor if you buy and sell securities for long-term capital gains and to earn dividends and interest.

Trader. You may be a trader if you buy and sell securities to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation. Your buy and sell orders must be frequent, continuous, and substantial. There are at present no clearcut tests to determine the amount of sales volume that qualifies a person as a trader. The term “trader” is not defined in the Internal Revenue Code or Treasury regulations. The IRS has not issued rulings for determining trader status. The Tax Court has held that sporadic trading does not qualify; see the Examples below.

Dealer. You are a dealer if you hold an inventory of securities to sell to others. Dealers report their profits and losses as business income and losses under special tax rules not discussed in this book.

EXAMPLES

1. After he retired, Holsinger began buying and selling stocks. In 2001, he made 289 trades over 63 days, and had losses of almost $179,000, which he reported as ordinary losses. In 2002, he made 372 trades over 110 days, and reported trading losses of just over $11,000 as an ordinary loss.

The Tax Court held that Holsinger was an investor, not a trader. His trading losses were capital losses, and as such they could ...