Day Trader

Yes. The capital gain and loss limitations do not apply to securities of a “dealer”, except for securities held primarily for investment. Nor do they apply to real estate sales by a dealer in realty, except for property as an investment. A “trader” is distinguished from a “dealer” in securities is subject to the capital gain and loss limitations. A securities “dealer” is similar to a merchant in that he purchases securities with the expectation of reselling them for a profit. The profit is based on hopes of finding a market of buyers to purchase the securities in excess of his cost. A “trader” buys and sells securities for his own account. A trader’s expectations of making a profit depend on the rise in value to sell at a price in excess of cost. More details can be found in IRS Publications 544 and 550 found at http://www.irs.ustreas.gov/prod/forms_pubs/forms.html

A Day Trader can classify his or her activity as a business reported on IRS Schedule C. This business is not limited to a annual capital loss limitation of $3,000. There is no limitation to the losses that may be incurred by Day Trader's business. Expenses for such things as computer equipment, supplies, margin interest, or software that might have been limited to 2% AGI limitations on IRS Schedule A can now be taken in full on IRS Schedule C. Also, a Day Trader may use the market-to-market accounting method for his or her portfolio. This will allow recognition of gains or losses before the gain is realized on the sale of the security.

A Day Trader is required to report his or her business activity on IRS Schedule C. Any income from the business is subject to both income and self-employment taxes. There is also a strict accounting/bookkeeping requirement. The Day Trader must segregate investments into 2 separate groups, trading securities and investment securities. Gains and losses from investment securities are reportable on IRS Schedule D. Gains and losses from trading securities are reportable on IRS Schedule C.

The Section 475(f) market to market election must be made by the due date of the previous year's tax return. The trader's short-term capital gains or losses are converted into ordinary income or loss. Losses that otherwise would have been limited to $3,000 are fully deductible against ordinary income in the current year. This election should be discussed with your local CPA.