Markin' it off

[Black Bart]

Was tryin' to think of what they call that day traders' dodge to beat the $3K capital gain barrier -- Marky Mark? No... / to Market, to Market to buy a fat...contract? No, no.../ the Mark of Cain't (stay out of the market)? No.../ Maker's Mark (that's pretty good stuff)? No...no...

And now the mail brings me a Mark-To-Market article about how the Tax Court killed off a taxpayer's claimed $200K stock-trading all-in-one-year ordinary loss and $100K of business expenses.

My interest is that 15 years ago my businessman client lost $100K (broker churned him) in the stock market. Equipment sales used up half; I've been writing off $3K annually since and, while it's a nice yearly tidbit, I've since thought I could have elected MM and made a killin' for him.

Turns out, it's a high bar to get over. TC said no fixed line makes you a trader; it depends on intent, nature of income, and trading regularity/extent/frequency. While I felt my guy's broker traded excessively (two-three trades every day), TC doesn't think that's much at all They said incorporating showed intent to become a trader, but "trading activities were not substantial" (first year-289 trades/63 days -- second year-372 trades-110 days) and were not timed for daily market swings. Many stocks were long-term investments "held over 31 days" (that's a new definition of long-term to me). They concluded he failed to establish trader status, could not make the MM election, ordinary losses were converted back to capital losses, and his fully deductible 1120 business expenses became "A" investment expenses.

Tough break for that guy and I guess mine didn't miss anything after all. Markin' it up to experience.

P.S. I don't know if having a broker execute orders (which my guy did) rather than doing it directly would disqualify you or not. At one time I traded stocks and commodities quite a bit, but always went through a broker (Scottrade, etc. weren't around at the time).

[thomtax]

Just curious

Did you ever make any money at it? My short foray into options trading told me that if I were sharp, I would never do that again.:-( An expensive lesson that I knew but ignored.

[JohnH]

How to make a small fortune trading options:

1) Begin with a large fortune;
2) Start trading options;
3) Stop trading when the fortune gets small enough.

[Black Bart]

Yes.

Did you ever make any money at it? My short foray into options trading told me that if I were sharp, I would never do that again.:-( An expensive lesson that I knew but ignored.

I took $900 and turned it into $10,000. Realizing how smart I was, I attempted to turn that into $100,000. One month later I had turned it into $3,500. I closed the account and made a truck payment.

[joanmcq]

Bart, to be a day trader, you've got to show that's what you do and all you do all day every day. Don't have another job and you have to seek to exploit day to day shifts in stock price. You've got to do hundreds and hundreds of trades to make the grade. So unless you are glued to the computer all day, you ain't a trader.

And 100K of 'business' expenses??? c'mon, what does bunch of monitors, an internet link, and some subscriptions to trading info websites cost?

[Black Bart]

Thanks Joanie,

Bart, to be a day trader, you've got to show that's what you do and all you do all day every day. Don't have another job and you have to seek to exploit day to day shifts in stock price. You've got to do hundreds and hundreds of trades to make the grade. So unless you are glued to the computer all day, you ain't a trader.

You surfer girls know just a little bitta ever'thang tax, doncha? In view of your and the Tax Court's analysis as it relates to my client, I must conclude my (pick one) wise judgment has been vindicated/ ignorance of the law has been confirmed.

The TC case guy was apparently in it in a big way -- first year (2000) he cleared $280K profit and (like me) realized how smart he was, so then (2001) he opened five brokerage accounts, incorporated, and promptly lost $179,000 while claiming $80K business expenses. In '02 he lost $11K and claimed $34K business expenses. I guess TC figured he's a high-roller hobbyist.

And 100K of 'business' expenses??? c'mon, what does bunch of monitors, an internet link, and some subscriptions to trading info websites cost?

Paper clips are up.

[JON]

I had one sad one

Friend and client had for twenty years worked for an insurance company that ended up holding the bag of a bunch of real estate in this area in a foreclosure. He managed and sold all the properties-it took twenty years. He received a nice bonus and 5 years ago decided to be a day trader. He set up his basement witht all the flat screens-had direct access to trading rooms of his gurus and then drove himself nuts, For three years he did it and lost. We never elected the mark. He had always had capital losses from before and they grew. There was very little other income to be offset anyway, but it would have generated a bigger Nol carryback. He had like four flat screens to monitor different markets and his guru's trading room activity.

In this crazy world sometime maybe we can discuss-Are the national stock trading markets all overvalued? How should the stocks be valued. Remember you are only buying a minority share so are their discounts for that as there is in trading a private company. Years ago those were fun discussion issues now-WHO KNOWS and although for every winner in the big market there is a loser-who should be in it. I have always thought of it as America's business backbone, but it truly is small business and it is tough to like big corporations now. Bonuses are more improtant than business health.

Long winded.

[joanmcq]

Every return except one ive seen that has come through our firms offices (and thats a lot of returns reviewed) where they've been day trading has been big, big losses. The one audit that had gains, the guy pretty much got audited every year on the trader issue, and won each time (my turn at him was the third in a row). he really was a trader and really did know what he was doing. Was all he did, day after day. When the market was really hot in the late 90s it was easy to make a lot...stocks only go up, remember?? Then a lot of people got to carry forward losses they'll never use up..have seen a lot of carryforwards that are pretty hard to believe too.

[Black Bart]

Playin' the market

Every return except one ive seen that has come through our firms offices (and thats a lot of returns reviewed) where they've been day trading has been big, big losses. The one audit that had gains, the guy pretty much got audited every year on the trader issue, and won each time (my turn at him was the third in a row). he really was a trader and really did know what he was doing. Was all he did, day after day. When the market was really hot in the late 90s it was easy to make a lot...stocks only go up, remember?? Then a lot of people got to carry forward losses they'll never use up..have seen a lot of carryforwards that are pretty hard to believe too.

There may be people who consistently beat the market, but I sure haven't seem many through the years. I have exactly one client (a bookish college prof--can't imagine where he gets stock tips) who usually makes a fair profit -- the others range from negligible to awful. They say 95% of diets fail and I'll bet the odds for traders aren't much better.

Still...the lure of the unattainable keeps beckoning -- I'm doing some small potatoes stock dabblin' with Scottrade (the good news: I only lost $300 last year). I think I know how to beat it -- just sell short 'cause the market almost invariably goes down. Problem is, shorting's like trading commodities; there's almost no limit to loss -- well, there is if you use stops, but it's still possible to run through a stop without execution in fast-moving markets. But anyway, your thoughts and prayers will be appreciated.

____________________________
"Buy good stocks that go up.
If they don't go up, don't buy 'em." -- Malcom Berko (Syndicated financial columnist)