Publication 550 |
2000 Tax Year |
Special Rules for Traders in Securities
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."
Note.
You may be a trader in some securities and have other securities
you hold for investment. The special rules discussed here do not apply
to the securities held for investment. You must keep detailed records
to distinguish the securities. The securities held for investment must
be identified as such in your records on the day you got them (for
example, by holding them in a separate brokerage account).
How To Report
Transactions from trading activities result in capital gains and
losses and must be reported on Schedule D (Form 1040). Losses from
these transactions are subject to the limit on capital losses
explained earlier in this chapter. Mark-to-market election made.
If you made the mark-to-market election, you should report all
gains and losses from trading as ordinary gains and losses in Part II
of Form 4797, instead of as capital gains and losses on Schedule D. In
that case, securities held at the end of the year in your business as
a trader are marked to market by treating them as if they
were sold (and reacquired) for fair market value on the last business
day of the year. But do not mark to market any securities you held for
investment. Report sales from those securities on Schedule D, not Form
4797.
Expenses.
Interest expense and other investment expenses that an investor
would deduct on Schedule A (Form 1040) are deducted by a trader on
Schedule C (Form 1040), Profit or Loss From Business, if
the expenses are from the trading business. Commissions and other
costs of acquiring or disposing of securities are not deductible but
must be used to figure gain or loss. The limit on investment interest
expense, which applies to investors, does not apply to interest paid
or incurred in a trading business.
Self-employment tax.
Gains and losses from selling securities as part of a trading
business are not subject to self-employment tax. This is true whether
the election is made or not.
How To Make the
Mark-to-Market Election
To make the mark-to-market election for 2001, you must
file a statement by April 16, 2001. This statement should be attached
to either your 2000 individual income tax return or a request for an
extension of time to file that return. The statement must include the
following information.
- That you are making an election under section 475(f) of the
Internal Revenue Code.
- The first tax year for which the election is
effective.
- The trade or business for which you are making the
election.
If you are not required to file a 2000 income tax return, you make
the election by placing the above statement in your books and records
no later than March 15, 2001. Attach a copy of the statement to your
2001 return.
After making the election to change to the mark-to-market method of
accounting, you must change your method of accounting for securities
under Revenue Procedure 99-49. Revenue Procedure 99-49
requires you to file Form 3115, Application for Change in
Accounting Method. Follow its instructions. Label the Form 3115
as filed under "Section 10A of the APPENDIX of Rev. Proc.
99-49."
Once you make the election, it will apply to 2001 and all later tax
years, unless you get permission from IRS to revoke it. The effect of
making the election is described under Mark-to-market election
made, earlier.
For more information on this election, see Revenue Procedure
99-17, 1999-1 CB 503.
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