Tax Alert: Option Traders are investors.

xandman

xandman

At least, according to the IRS if you want to claim Trader Status.

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The court found that although 1543 trades in 2008 was significant, he actually only traded on 112 different days. Thus, he was not trading every day, nor trying to catch the swings in daily market movements. Instead, his average holding period was 35 days, and some positions were held for as long as 5 months."

= BorntoSell

http://www.ustaxcourt.gov/InOpHistoric/endicottmemo.ruwe.TCM.WPD.pdf

BTS, Further recommends you split your covered call portfolio from your daily scalping. and report the activities differently.. Consult your Tax Advisor.
 
when you read thru it the TP never requested Trader status with the IRS and reported gains and losses on a SC D...expenses on a C...thats the mistake from the get go. Also it appears he may have been co-mingling expenses...they seem rather excessive..dunno just a cursory read thru.
 
If you read the pdf, you can see that this guy was an active investor who had other income. Few here would consider him an active trader, so it is not surprising that he is viewed as an investor.

His rationale that options should be viewed as actively traded on days where they are just held is ridiculous, and anyone claiming something like that shows themselves as not a trader. He was trying to claim that holding stock for a long time, then selling covered calls against it was active trading of the options. We all know that makes no sense, the main position in the stock being held for a long time and that makes him an investor.

I do appreciate you posting this though, it was a good read. It gives us some more information into the thinking and rationale of the IRS with regard to trader status.
 
Quote from opt789:

If you read the pdf, you can see that this guy was an active investor who had other income. Few here would consider him an active trader, so it is not surprising that he is viewed as an investor.

His rationale that options should be viewed as actively traded on days where they are just held is ridiculous, and anyone claiming something like that shows themselves as not a trader. He was trying to claim that holding stock for a long time, then selling covered calls against it was active trading of the options. We all know that makes no sense, the main position in the stock being held for a long time and that makes him an investor.

I do appreciate you posting this though, it was a good read. It gives us some more information into the thinking and rationale of the IRS with regard to trader status.
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I disagree. I think rationale that traders and investors should pay taxes differently is ridiculous and accounting should be marked to market without financial shenanigans.
 
Quote from gkishot:

I disagree. I think rationale that traders and investors should pay taxes differently is ridiculous and accounting should be marked to market without financial shenanigans.
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If you don’t think professional traders should be able to deduct their relevant expenses, then I would disagree. Every other business gets to do it, why shouldn't traders? If you are saying everyone should be able to deduct all investment or trading expenses regardless of trader status, then I would say good luck with that, I don’t think they will ever allow it.
 
Quote from opt789:

If you don’t think professional traders should be able to deduct their relevant expenses, then I would disagree. Every other business gets to do it, why shouldn't traders? If you are saying everyone should be able to deduct all investment or trading expenses regardless of trader status, then I would say good luck with that, I don’t think they will ever allow it.
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Not sure how the trader's expenses are bigger than investor's. What i am against is the artificial wash sale rule when one can't deduct his market losses without 30 days market break.
 
Essentially the way I read it he was trying to avoid paying SE taxes and get the benefits of lower capital gains taxes He had 2 Sc C's. One was from "consulting" which essentially was income from his business he sold of over $200K. So basically he wanted trader status and M2M so he COULD deduct all his margin interest of over $300K on the second Sc C which would offset the all the gains of the 1st Sch C (since all Sch C's are combined to compute SE Taxes).

Taking margin interest on the Sch A is restricted and would do nothing to offset the income from the Sch C to reduce his SE.

Traders who elect M2M are supposed to take all expenses including margin interest off on their Sch C. All their trading income is reported as ordinary income on the 4797. In his case since some of his capital gain was over a year he took the gains and losses on the D so he could get long term tax treatment.

IOW he wanted to have his cake and eat it too. IRS said no no...active INVESTING is NOT someone in the business of trying to make a living by actively trading. As mentioned you can do both if you have different types of portfolio's and trading styles but you do have to show consistancy and not cheat..IMO he was cheating. or trying to. He shouldn't get away with it.
 
In this period of time there was also 10 months where he executed 3 or less trades per month. So all those "sim" months you put into it don't count:D
 
Quote from RichardRimes:

IRS said no no...active INVESTING is NOT someone in the business of trying to make a living by actively trading.
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Whether it's business to make a living or not is in the eye of the beholder. As far as I am concerned if some one incorporates his activities and pays corp taxes that's enough of a reason to declare his intentions to make a living from these business activities.
 
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