Many clients of ProVision and our School of Tax Strategy have chosen as their preferred growth asset category stock and option trading. When done properly and with the right set of systems, this category and be very lucrative. We have clients who are doing as well as 7-10% per month on their trading activity. Of course, there are many people who lose money because they don't have the training or don't strictly follow their criteria.
In either case, the question comes up as to how to treat the expenses of trading and how to treat the gains and losses from trading.
The IRS has consistently asserted (and won) the argument that gains and losses on strock trading by a noncorporate taxpayer are capital gains and losses. This is true whether the taxpayer is considered an investor or a trader. The effect of this is that losses can only be used to offset capital gains except for $3,000 per year that can offset other income.
But what about the other expenses of trading? Whether they are deductible or whether they are also capital losses depends on whether the taxpayer is considered a trader or investor. If the taxpayer is an investor, the expenses are simply additional costs of the stock and will be capital losses. If the taxpayer is an investor, the expenses will be deductible as incurred in the production of income.
There are three tests the IRS and courts use to determine trading status:
1. The taxpayer's investment intent
2. The nature of the taxpayer's income to be derived from the securities (interest and dividends for an investor versus gains for a trader) and
3. The frequency, extent and regularity of the taxpayer's trading activities
In general, it takes a lot of trading activity (multiple trades each day) to show that you are a trader. Because the test is based solely on your specific facts and circumstances, I recommend that you sit down with your Tax Coach to figure out whether you are a trader or investor and how you should carry on your trading activities (i.e., individually or through a corporation). Call us at 866.467.5809 to set up your appointment to speak to one of our experienced Tax Coaches or join our School of Tax Strategy at http://www.provisionwealth.com/products.
Best of luck in your trading activities. Remember to stay focused and stick to your criteria.
Warmest regards,
Tom