Now that we are in the last month of the 2017 tax season, we thought we’d compile a list of the most common questions day traders ask!

Question 1 – What is trader tax status  and do I qualify?

Trader Tax Status is a classification achieved through meeting certain criteria established by IRS Topic 429.  With Trader Tax Status the IRS regards you as an active trader and all of your gains and losses become ordinary. Additionally, you can elect Mark-to-Market Accounting.  There is no one size fits all approach as each traders facts and circumstances are different.  If in doubt please consult a professional or schedule a consultation with us, we’d be glad to help!

Question 2 – What is Mark To Market Accounting?

Section 475 Mark to Market method of accounting has the effect of converting capital gains and losses into ordinary gains and losses.  Traders who qualify for trader tax status and elect Section 475 are exempt from wash sale limitation rules.  Your realized gain or loss is then recorded for tax purposes on Form 4797.  Think of it as “tax loss insurance” in the event you have a bad year trading.  Without mark to market accounting you are subject to loss limitation rules.

Question 3 – What are Wash Sales

Because active traders are speculative in nature and hold securities for short periods of time, the likelihood that they trade the same Security in a 30 day window is highly likely.  Wash sales are derived from the wash sale rule that prohibits a taxpayer from claiming a loss on the sale of an investment when the same investment was purchased within 30 days before or after the sale date. Your anticipated tax loss is disallowed if, within the period beginning 30 days before the date of the loss sale and ending 30 days after that date, you acquire “substantially identical” stocks or securities

Question 4 – I’m a short-seller! Can I deduct my stock locate fees?

For tax purposes, stock borrow locate fees are Section 212 “investment expenses” for investors and Section 162 business expenses for traders qualifying for trader tax status. Stock borrow locate fees are not “interest expense” so investors can’t include them in Section 212 “investment interest expense”.  Make sure your tax professional makes that distinction as investment expenses face the 2% limitation as opposed to investment interest expense.  The bad news for investors is that these can no longer be deducted after tax year 2017.

Question 5 – How Do I Qualify For Trader Tax Status?

It is not easy to qualify for trader tax status and the IRS literature is not completely black and white.  Currently there is no objective test to establish trader tax status.   Case law establishes the following two part test to qualify:

• Taxpayer’s trading activity must be substantial, regular, frequent and continuous.
• Taxpayer must seek to catch the swings in the daily market movements and profit from these short-term changes rather than profiting from long-term holding of investments.

Extremely vague!  We use history and case law to build your case to ensure you pass the litmus test.  If you are not sure please see a professional well versed in trader tax issues.