Trader Status

[Bob M]

We have a partnership that has been buying and selling stocks. In previous tax years we have obtained both short term gains and losses and recieved capital gain treatment as well. Now we have substantial losses left in our portfolio. We have owned these stocks for more than one year.

Question: Can we file for trader status in 2006 and make the mark-to-market election so as to be able to deduct our large losses in 2006?

[Scarecrow]

Trader in Securities

Trader status is not determined by what benefits you the most. Trader status is determined by the facts and circumstances of how you trade in securities. To be a trader, your trading activity must be substantial and must be considered part of a trade or business. It must be frequent, regular, and continuous. Sporadic trading does not count.

Court cases that have dealt with this issue indicate that the number and frequency of transactions should almost be on a daily bases for more than a single tax year. They also indicate that the trading activity should be the taxpayer’s primary source of income.

An individual who made substantial trades, but 94% of them were made in just 3 months qualified as frequent, regular, and continuous during those 3 months, but not for the rest of the year. Thus, the court ruled the individual did not qualify as a trader in securities for the year. (Chen, Tax Court Memo, 2004-132)

It is also disturbing to hear you try to get the best of both worlds. Traders get ordinary loss treatment, not subject to the $3,000 per year limit on capital losses, but they must pay ordinary tax rates on gains. Investors get favorable capital gain rates on gains, but are limited to $3,000 per year for losses. You already received favorable capital gain rates on those stocks that produced gain. Now you want to change the rules and get favorable ordinary income loss treatment for your loser stocks. I think any court in the land would see through that. What are you going to do after you realize your ordinary losses and start to show gains again? Go back to investor status? That does not indicate trade or business status since you do not have a profit motive to sell the stocks at a loss.

caw