Frequently Asked Tax Questions And Answers
Keyword: Day Trader
10.2 Capital Gains, Losses/Sale of Home: Stocks (Options, Splits, Traders)
I buy and sell stocks as a day trader using an online brokerage firm. Can
I treat this as a business and report my gains and losses on Schedule C?
A business is generally an activity carried on for a livelihood or in good faith
to make a profit. Rather than being defined in the tax code, exactly what activities
are considered business activities has long been the subject of court cases. The facts
and circumstances of each case determine whether or not an activity is a trade or
business. Basically, if your day trading activity goal is to profit from short-term
swings in the market rather than from long-term capital appreciation of investments,
and is expected to be your primary income for meeting your personal living expenses,
i.e. you do not have another regular job, your trading activity might be a business.
If your trading activity is a business, your trading expenses would be reported
on Form 1040, Schedule C (PDF), Profit or Loss from
Business (Sole Proprietorship) instead of Form 1040, Schedule A (PDF), Itemized
Deductions. Your gains or losses, however, would be reported on Form 1040, Schedule D (PDF), Capital Gains and Losses, unless you file an election
to mark to market under Internal Revenue Code Section 475 (f).
If your trading activity is a business and you elect to change to the mark-to-market
method of accounting, you would report both your gains or losses on Part II of Form 4797 (PDF), Sales of Business Property. An election
to mark to market generally must be made by the due date of the prior year's return.
A change in your method of accounting requires the consent of the Commissioner
and can not be revoked without the consent of the Commissioner. Though there is no
publication specific to day traders, the details for traders information for securities
and commodities is covered in Internal Revenue Code Section 475(f) and Revenue Procedure
99-17, and as modified by Rev. Proc. 200-19 .
References:
Is there any publication that explains the proper way to file a Schedule
C as a day trader?
There is no publication specific to DayTraders. But see the
Instructions for Form 1040, Schedule D . The section "Traders in Securities" has information for
DayTraders.
Internal Revenue Code section 475(f) and Revenue Procedure 99-17 apply only to
traders who elect to use mark-to-market method of Accounting.
References:
I am a stock day trader. I understand I have the option of electing the
mark-to-market method of accounting which would preclude application of the wash sale
rule. What forms and publications do I need?
If your trading activity is a business, your trading expenses would be reported
on Form 1040, Schedule C (PDF), Profit or Loss from
Business (Sole Proprietorship) instead of Form 1040, Schedule A (PDF), Itemized Deductions . Your gains or losses, however,
would be reported on Form 1040, Schedule D (PDF), Capital
Gains and Losses , unless you file an election to change your method of accounting
to the mark-to-market method of accounting.
See Publication 550, Investment Income and Expenses (p. 68) for
guidance on how to make the mark-to-market election. You need Form 3115 (PDF), Application for Change in Accounting Method. The mark-to-market
method of accounting cannot be revoked without the consent of the Secretary.
If you qualify and elect to change to the mark-to-market method of accounting,
you would report your gains or losses on Part II of Form 4797 (PDF), Sales of Business Property .
References:
I have expenses associated with my day trading business, but I am unsure
about how to report my gains and losses. How do I file as a day trader and how do
I use the mark-to-market accounting method?
Special rules apply if you are a trader in securities in the business of
buying and selling securities for your own account. To be engaged in business as a
trader in securities, you must meet all the following conditions.
. You must seek to profit from daily market movements in the prices of securities
and not from dividends, interest, or capital appreciation
. Your activity must be substantial.
. You must carry on the activity with continuity and regularity.
The following facts and circumstances should be considered in determining if your
activity is a securities trading business.
. 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.
. The amount of time you devote to the activity.
If your trading activity is a business, your trading expenses would be reported
on Form 1040, Schedule C (PDF), Profit or Loss from
Business (Sole Proprietorship) instead of Form 1040, Schedule A (PDF),
Itemized Deductions. Your gains or losses, however, would be reported on Form 1040, Schedule D (PDF), Capital Gains and Losses,
unless you file an election to change your method of accounting.
If you qualify for and elect to change to the mark-to-market method of accounting,
you would report both your gains or losses on Part II of Form 4797 (PDF), Sales of Business Property.
The mark-to-market method of accounting cannot be revoked without the consent of
the Secretary. Though there is no publication specific to day traders, the details
for traders in securities and commodities are covered in Internal Revenue Code section
475(f) and Revenue Procedure 99-17.
If you elect to use the mark-to-market method of accounting, a security that you
hold at the end of the tax year will generally be treated as sold at its fair market
value on the last business day of the tax year. Any gain or loss must be recognized.
That gain or loss is taken into account as an adjustment in figuring your gain and
loss when you later dispose of the security. See Publication 550, Investment
Income and Expenses, for general information on mark-to-market accounting rules.
References:
- Publication 535, Business Expenses
- Publication 550, Investment Income and Expenses
- Form 3115 (PDF), Application for Change
in Accounting Method
- Form 4797 (PDF), Sales of Business Property
- Internal Revenue Code Section 475(f)
- Revenue Procedure 99-17
I am a day trader. How do I go about paying tax on the gain as a business
and not on Schedule D?
Special rules apply if you are a trader in securities in the business of
buying and selling securities for your own account. To be engaged in business as a
trader in securities, you must meet all the following conditions.
. You must seek to profit from daily market movements in the prices of securities
and not from dividends, interest, or capital appreciation.
. Your activity must be substantial.
. You must carry on the activity with continuity and regularity.
The following facts and circumstances should be considered in determining if your
activity is a securities trading business.
. Typical holding periods for securities bought and sold.
. The frequency and dollar amount of your trades during the year.
. The extent to which you to produce income for a livelihood.
. The amount of time you devote to the activity.
If your trading activity is a business, your trading expenses would be reported
on Form 1040, Schedule C (PDF), Profit or Loss from
Business (Sole Proprietorship) instead of Form 1040, Schedule A (PDF),
Itemized Deductions. Your gains or losses, however, would be reported on Form 1040, Schedule D (PDF), Capital Gains and Losses,
unless you file an election to change your method of accounting.
If you qualify and elect to change to the mark-to-market method of accounting,
you would report both your gains or losses on Part II of Form 4797 (PDF), Sales of Business Property.
The mark-to-market method of accounting cannot be revoked without the consent of
the Secretary. Though there is no publication specific to day traders, information
for traders in securities and commodities is in Section 475(f) of the Internal Revenue
Code, Revenue Procedure 99-17, Revenue Procedure 2002-19, and Publication 550, Investment
Income and Expenses.
For details about not-for-profit activities, refer to Chapter 1 in Publication 535, Business
Expenses. That chapter explains how to determine whether your activity is carried
on to make a profit and how to figure the amount of loss you can deduct.
Regardless of whether your day trading activities are reported on Schedule D or
on Form 4797, you may need to pay tax on your gains by following the requirements
for making estimated tax payments on Form 1040-ES (PDF), Estimated
Tax for Individuals.
References:
11.1 Sale or Trade of Business, Depreciation, Rentals: Depreciation & Recapture
I purchased a computer last year to do online day trading part-time
from home for additional income. Can I deduct or depreciate the cost of the
computer or internet connection from my investment income?
You may deduct investment expenses (other than interest expenses) as miscellaneous
itemized deductions on Form 1040, Schedule A (PDF),
line 22, Itemized Deductions. This would include depreciation on
the portion of your computer used for investment purposes, and the portion
of your internet access charges used for investment purposes.
A deduction for depreciation of a computer for business use can be expensed
in the first year if qualified, or depreciated over the recovery period. To
claim the expense in the first year, the property must be used more than 50%
for business use, and meet the other requirements for expensing.
The 2003 Jobs and Growth Act raised the aggregate cost that can be expensed
for any tax year beginning after 2002 and before 2006 to $100,000. The new
law also expanded the definition of Code Section 179 property to include off-the-shelf
computer software. See Code Section 179 for the expanded definition. If the business use falls
to 50% or less in a later year, these tax benefits may be subject to recapture.
See Publication 946 , How to Depreciate Property for
additional information on the special deduction.
These deductions must be reduced by 2% of your adjusted gross income. Use Form 4562 (PDF), Depreciation and Amortization,
to compute the depreciation for the portion of your computer used for investment
purposes.
Note: Unless the computer is used more than 50% for business purpose (as
opposed to investment purposes), you cannot claim section 179 expensing of
the computer or claim accelerated depreciation for it. For more information,
refer to "Listed Property" in Publication 946, How to Depreciate Property.
References:
12.7 Small Business/Self-Employed/Other Business : Income & Expenses
Can I deduct my investment expenses as business expenses?
In order to properly determine the correct treatment income and expenses, it is
first necessary to classify the type of investment activity occurring.
An Investor buys and sells securities solely for their own
account. They are not engaged in a trade or business. An investor's investment expenses
are taken as miscellaneous itemized deductions on Form 1040, Schedule A (PDF) , subject to the 2% AGI limitations (with the exception of
investment interest which is not a miscellaneous deduction but subject to its own
special limitations). An investor's sale of securities results in capital gains and
losses.
A Dealer in securities has inventories of securities that
they hold for sale to customers in the ordinary course of their trade or business.
Their business expenses are deductible as ordinary business expenses. A dealer doing
business as a sole proprietor would deduct their expenses on 1040 Schedule C. A Dealer's
sale of securities is reported as ordinary income.
A third classification is Trader . A Trader is in the trade
or business of buying and selling securities for their own account. You are a trader
in securities if you meet all of the following conditions:
You must seek to profit from daily market movements in the prices of securities
and not from dividends, interest, or capital appreciation.
Your activity must be substantial.
You must carry on the activity with continuity and regularity.
The following facts and circumstances should be considered in determining if your
activity is a securities trading business:
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
The amount of time you devote to the activity.
:
A trader's business expense are reported on Form 1040, Schedule C (PDF) ,
not as itemized deductions on 1040 Schedule A. The deductions are not subject to the
limitations that apply to Schedule A (2% AGI limitation and special limits on investment
interest). A trader gain or loss on sale of securities is reported as capital gain
or loss on Form 1040, Schedule D (PDF) unless they have
made the mark-to-market election.
If a trader has made a mark-to-market election, gains and losses are reported on
part II of Form 4797 (PDF) as ordinary income. For information
regarding the manner and timing of making the mark-to-market election, see Publication 550 , Investment Income and Expense or Revenue
Procedure 99-17, 1999-1 CB 503.
The proper classification of your investment activities is important to determine
how income and expenses are to be reported. Investors trade solely for their own account
and do not carry on a trade or business. Their securities sales result in capital
gain or loss and their deductible expenses are itemized deductions. Dealers sell securities
to customers in the ordinary course of trade or business. Their sales result in ordinary
gain or loss and their deductible expenses are trade or business expenses. Traders
buy and sell securities frequently but have no customers. Their purchases and sales
result in capital gain and loss, and their deductible expenses are trade or business
expenses.
Even if you engage in extensive securities activities, you are an investor, not
a dealer or trader, if you do not seek profit primarily in swings in daily market
movements, and do not personally engage in or direct the purchases or sales. An investor
trades for profit-motivated reasons such as long-term appreciation, dividends and
interest. Whether the activities of an individual constitute trade or business or
investment is determined from the facts in each case. These distinctions have been
established through court cases.
If your trading activity is a business, your trading expenses would be reported
on Form 1040, Schedule C (PDF), Profit or Loss from
Business (Sole Proprietorship) instead of Form 1040, Schedule A (PDF), Itemized Deductions. Your gains or losses, however,
would be reported on Form 1040, Schedule D (PDF), Capital
Gains and Losses, unless you file an election to change your method of accounting.
If your trading activity is a business and you elect to change to the mark-to-market
method of accounting, you would report both your gains or losses on Part II of Form 4797 (PDF), Sales of Business Property .
A change in your method of accounting requires the consent of the Commissioner
and can not be revoked without the consent of the Secretary. Though there is no publication
specific to day traders, the details for traders in securities and commodities are
covered in Internal Revenue Code Section 475 (f) and Revenue Procedure 99-17.
References:
12.8 Small Business/Self-Employed/Other Business : Schedule C & Schedule SE
I buy and sell stocks as a day trader using an online brokerage firm. Can
I treat this as a business and report my gains and losses on Schedule C?
A business is generally an activity carried on for a livelihood or in good faith
to make a profit. Rather than defined in the tax code, exactly what activities are
considered business activities has long been the subject of court cases. The facts
and circumstances of each case determine whether or not an activity is a trade or
business. Basically, if your day trading activity goal is to profit from short-term
swings in the market rather than from long-term capital appreciation of assets, if
your income is primarily from the sale of securities rather than from dividends and
interest paid on securities, and if you expect this income to be your primary income
for meeting your personal living expenses, i.e. you do not have another regular job,
then your trading activity might be a business.
For details about not-for-profit activities, refer to Publication 535, Business
Expenses. That chapter explains how to determine whether your activity is carried
on to make a profit and how to figure the amount of loss you can deduct.
If your trading activity is a business, your trading expenses would be reported
on Form 1040, Schedule C (PDF), Profit or Loss from
Business (Sole Proprietorship) , instead of Form 1040, Schedule A (PDF), Itemized Deductions. Your gains or losses, however,
would be reported on Form 1040, Schedule D (PDF), Capital
Gains and Losses , unless you file an election to change you method of accounting.
If your trading activity is a business and you elect to change to the mark-to-market
method of accounting, you would report both your gains or losses and your trading
expenses in Part II of Form 4797, Sale of Business Property. See Publication 550, Investment Income and Expenses , for details.
A change in your method of accounting requires the consent of the Commissioner
and can not be revoked without the consent of the Secretary. Though there is no publication
specific to day traders, the details for traders in securities and commodities are
covered in Internal Revenue Code Section 475 (f) and Revenue Procedure 99-17.
References:
|
