By Gary Krupa, CPA
October 11, 2012
Significant tax advantages are available if you qualify as a trader of securities rather than as an investor in securities. Trading would enable you to report trading activities as if you were conducting a business even if you buy and sell securities for your own account.
- You wouldn’t be limited to deducting $3,000 in losses per year on securities transactions, as you would be if you filed Schedule D Form 1040 as an investor;
- Interest expense and other investment expenses would be deducted directly from Gross Income, rather than from Adjusted Gross Income on Form 1040. This means they’d be deductible even if you take the Standard Deduction rather than itemize your deductions.
- You wouldn’t pay self-employment tax on gains and losses from selling securities, as you would on other business income greater than $434.
This is why “trading” and “investing” are not synonymous at least as they relate to the tax law.
More information, including how to qualify as a securities trader, can be found in:
- Tax topic 429 on the IRS website, http://www.irs.gov/taxtopics/tc429.html
- IRS Publication 550 “Special Rules for Traders in Securities”, on the IRS website or at http://taxmap.ntis.gov/taxmap/pubs/p550-029.htm
It may not be easy to qualify as a trader in securities. Read this Forbes article that explains how difficult it was for one individual to qualify as a trader, even though he was involved in high dollar-volume activity buying and selling securities.
Gary Krupa is a CPA in Arizona, with more than twenty-five years experience providing accounting, tax, audit and computer services to organizations of all sizes. He’s especially attentive to the needs of his clients. He moved to Rimrock, Arizona in late May 2008. He has offices in Rimrock and Peoria, AZ. His e-mail address is firstname.lastname@example.org. His website URL is http://garykrupacpa.com.