[CANSLIM] IRS rules for traders (was dumb question...)

From: "Charles & Lois Layne" <lelayne@earthlink.net>
Subject: [CANSLIM] IRS rules for traders (was dumb question...)
Date: Wed, 16 Jul 2003 07:47:47 -0400

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- ----- Original Message -----
>
>      I'm not an accountant (nor do I wish to play one), but it seems to me
> that if the IRS agrees to categorize you as being an independent investor,
all
> your investing activities can be deducted as business expenses.
>

Actually, the specification is not "independent investor."  There are rules
for "traders in securities,"  and they are rather stringent.  I am quoting
from the current IRS publication 550:

"Special rules apply if you are a trader in securities in the business of
buying and selling securities for your own account. To be engaged in
business as a trader in securities, you must meet all the following
conditions.

 You must seek to profit from daily market movements in the prices of
securities and not from dividends, interest, or capital appreciation. Your
activity must be substantial. You must carry on the activity with continuity
and regularity.

The following facts and circumstances should be considered in determining if
your activity is a securities trading business.
Typical holding periods for securities bought and sold. The frequency and
dollar amount of your trades during the year. The extent to which you pursue
the activity to produce income for a livelihood. The amount of time you
devote to the activity.

If your trading activities are not a business, you are considered an
investor, and not a trader. It does not matter whether you call yourself a
trader or a "day trader.""

I have found additional information at various websites for day traders.
Sorry, I do not have the URLs anymore since this was a few years ago.
Search for day trading, something should come up.  Those sites emphasize the
stringency of the IRS rules which is essentially that in order to file stock
activity using sole proprietor forms instead of capital gains forms, you
pretty much have to be a day trader making a living from your activity.
Anyone using CANSLIM principles must be regarded as an investor, since the
holding period is too long (ie, seeking profit from capital appreciation).
Pub 550 does note that one can be a trader and also have other securities
for investment, but the special rules for traders would not apply to the
securities held for investment.  You must keep detailed records to
distinguish the securities (the recommendation is even maintaining separate
brokerage accounts).

If you meet the IRS criteria to be a trader in securities, then there are
tax advantages.  Since you report gains and losses as a business, you do not
have to worry about the wash rule.  However, you must make a
"Mark-to-Market" accounting method election (also covered in pub 550) for
your trading business.  You also report expenses related to your business
(such as was being discussed in the forum) on schedule C, Profit or Loss
from Business, instead of schedule A.

Even though I began trading short term more frequently a few years back, I
determined that I do not meet the IRS rules.  First, I cannot claim at this
point that I am making a living from the trades.  Second, although I prefer
to buy and sell the same day, some of my holding periods end up being a few
weeks or more.  You really can't get by with much more than an overnight
holding period to qualify as a trader in security per IRS rules.

So... even if some of you out there are really making a living from your
investments, you must still report them as capital gains (or losses) and
must account for investment related expenses as an itemized deduction.


Chuck Layne




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