Investment expense

[Bill Tubbs]

I know that "Investment-Related Seminars" are not deductible, but my question is this a "convention, seminar, or similar meeting for investment purposes". (quotes from Pub 17, pg 192)

Client attended "Better Trades school" -- said it was a 3-day event, class size of 25 people for 1 instructor, costing $2995. When asked if it was a seminar, client didn't think so since the groups were small and questions could readily be asked as the classes progressed.

Any esteemed colleagues have experience with whether this is deductible or not? If deductible, how about the 120 miles each way, the nights in a hotel, and per diem?

BTW, after attending this "school" client did make $2500 on trades, all short-term.

Bill

[Roland Slugg]

No, but the sponsor can

Dear Bill

Nope. Nor are the travel expenses deductible, since this wasn't in connection with a trade or business.

They might be considered "education" expenses, but unless the taxpayer was legitimately in the business of trading, that angle won't work either. If they helped him get into that business, they weren't taken to "maintain or improve" his skills, but were taken the learn the initial skills.

The sponsor, however, can deduct his expenses, since he's in the "business" of giving seminars. Moral: Don't take seminars ... conduct them.

[Bill Tubbs]

In the business of trading

I spoke with him yesterday about whether to treat his trading this past year as investment or business. He's a farmer and said that if he starts doing well with his trading that he could certainly see himself scaling back the farming (which he's had losses the past few years -- his wife keeps them above water) and focusing on trading. At what point does trading in securities switch from investment to self-employment?

Bill

[Roland Slugg]

At what point does trading in securities switch from investment to self-employment?

That'a a facts-and-circumstances question, and as long as he still operates a farm, it probably won't fly with the IRS. Also, in order to treat trading activity as a "business," he will have to start reporting the sales on Schedule C, not Schedule D, and pay SE tax on the profits. As I recall there is also an election a taxpayer needs to make to declare himself as a "trader" (or perhaps the term is "day trader").

[Joe Btfsplk]

I spoke with him yesterday about whether to treat his trading this past year as investment or business. He's a farmer and said that if he starts doing well with his trading that he could certainly see himself scaling back the farming (which he's had losses the past few years -- his wife keeps them above water) and focusing on trading. At what point does trading in securities switch from investment to self-employment?

Bill

His success in trading is in line with the principle, "Genius is a rising market."
When the market goes south, the only way you can make money is selling short. After a long rise, it won't be long until another market decline arrives. Then you either hold what you have and wait for the decline to end, or sell short or sell and wait for the down-trend to reverse. If you trade in and out on the long side, you can lose your shirt.

[Grumpy]

That'a a facts-and-circumstances question, and as long as he still operates a farm, it probably won't fly with the IRS. Also, in order to treat trading activity as a "business," he will have to start reporting the sales on Schedule C, not Schedule D, and pay SE tax on the profits. As I recall there is also an election a taxpayer needs to make to declare himself as a "trader" (or perhaps the term is "day trader").

Daytraders report their sales on Schedule D, unless they have elected Mark to Market, in which case their sales are reported on Form 4797.
There is no election for "daytrader" - it is a facts and circumstances matter. An election does have to be made to use Mark to Market accounting. Daytraders report their operating expenses on Schedule C, but not their trades, whether or not Mark to Market has been elected.

[Snaggletooth]

Seven Dwarfs

Grumpy, where have you been? Good to have you back on the board.

Do you have any idea why "mark to market" sales are considered sales of business property (4797) instead of investments (D)??

I didn't know this, but there's lots of stuff I don't know. Thanks for filling me in.

[Grumpy]

Grumpy, where have you been? Good to have you back on the board.

Do you have any idea why "mark to market" sales are considered sales of business property (4797) instead of investments (D)??

I didn't know this, but there's lots of stuff I don't know. Thanks for filling me in.

I think they did it just to complicate our lives a little more! But seriously, I don't think I've ever read an explanation of this. One thing I forgot to mention, that you may already know, the gains from the trading activity are not subject to SE, whether daytraders have elected Mark to Market accounting or not.

[Bill Tubbs]

Sch C but no SE?

I think they did it just to complicate our lives a little more! But seriously, I don't think I've ever read an explanation of this. One thing I forgot to mention, that you may already know, the gains from the trading activity are not subject to SE, whether daytraders have elected Mark to Market accounting or not.

So Grumpy, if I understand you correctly, you're saying daytraders report sales of stock on either Sch D or 4797 (depending on the Mark to Market election), all their expenses on Sch C, and are not subject to SE... (just found this on the IRS site: http://www.irs.gov/faqs/faq-kw36.html ). I'm figuring the non-SE is simply because Sch C then always shows a loss -- right?

Bill

[Grumpy]

So Grumpy, if I understand you correctly, you're saying daytraders report sales of stock on either Sch D or 4797 (depending on the Mark to Market election), all their expenses on Sch C, and are not subject to SE... (just found this on the IRS site: http://www.irs.gov/faqs/faq-kw36.html ). I'm figuring the non-SE is simply because Sch C then always shows a loss -- right?

Bill

Probably so. I don't see how it could be otherwise because the Schedule C should never have income from the trading activity. I suppose someone could enter income from some other source on the Schedule C, but I can't think of any reason why they should.