Day Trade

[Oh Baby!]

I know there is a form for those who trade stocks to register with the IRS as a "day trader" and then the reporting requirements are changed. does anyone know the form number?

[kcjenkins]

It is not a Form, it is an election. And it must be filed by the due date of their tax return, for the year preceding the Section 475 election year. So if you file it now, it would be effective for the 2011 tax year, because it is too late to elect it for 2010, that had to be done by 4/15/09. You can find the election in the Elections form. Go to the 1040 tab at the bottom, and it is the 8th item.

Don't let the wording of that election fool you. It does NOT go into effect for the "current year". Read http://www.irs.gov/pub/irs-irbs/irb97-07.pdf

and http://www.irs.gov/pub/irs-irbs/irb05-24.pdf and, of course, §475 itself.

[Oh Baby!]

Thanks! but I think I was looking for something more. I want to be able to deduct all the costs of his trading, such as his computer, subscriptions, home office. I believe that a regular individual would include all of that as 2% itemized on Sch A since their stock trades appear on Sch D. I was under the impression that there is a form where I can make an election for the taxpayer who does nothing but day trading to be treated as a "professional (day) trader" and then make it easier (not limited to 2% of AGI) to deduct associated expenses.

[JRS]

You should probably read this article from the IRS. It goes into a little depth on what qualifies as a day trader vs an investor and where and when you are able to take deductions, etc.

http://www.irs.gov/taxtopics/tc429.html

Topic 429 - Traders in Securities (Information for Form 1040 Filers)

[Gail in Virginia]

Thanks! but I think I was looking for something more. I want to be able to deduct all the costs of his trading, such as his computer, subscriptions, home office. I believe that a regular individual would include all of that as 2% itemized on Sch A since their stock trades appear on Sch D. I was under the impression that there is a form where I can make an election for the taxpayer who does nothing but day trading to be treated as a "professional (day) trader" and then make it easier (not limited to 2% of AGI) to deduct associated expenses.

I am at home, and so I do not have access to my usual research materials, but if he elects to be a professional day trader so that all expenses can be deducted without regard to the 2% limitation, wouldn't he then have to file on a sched C and pay SE tax on his gains? Are you sure this is what the situation calls for?

[JRS]

if he elects to be a professional day trader so that all expenses can be deducted without regard to the 2% limitation, wouldn't he then have to file on a sched C and pay SE tax on his gains?

If he meets the qualifications of a day trader, (and wants to be), he is required to file schedule C. Gains and losses from selling securities as part of a trading business are not subject to self–employment tax.

[Redneck]

If he meets the qualifications of a day trader, (and wants to be), he is required to file schedule C. Gains and losses from selling securities as part of a trading business are not subject to self–employment tax.

If the taxpayer's trading activity rises to the level necessary to be considered a business, and the Marked to Market election has not been made, then his business expenses are reported on Schedule C and his trading activities are reported on Schedule D, and thus his gains would be capital gains and not subject to SE tax. Meeting the rather stringent tests to be considered in business as a day trader might be difficult though.

[kcjenkins]

I am at home, and so I do not have access to my usual research materials, but if he elects to be a professional day trader so that all expenses can be deducted without regard to the 2% limitation, wouldn't he then have to file on a sched C and pay SE tax on his gains? Are you sure this is what the situation calls for?

No, a day trader reports the income on the 4797. and the business expenses on a C. So that C will always show a loss.

[JRS]

>>a day trader reports the income on the 4797<<

Only if the mark to market election has been made for the current year. (Elected n the prior year, section 475(f) and have filed a form 3115, change in accounting method.)

[joanmcq]

If mark to market hasn't been made, the trades are still on the D. The trading income is never on the C.

[kcjenkins]

Right. The hard part is convincing the IRS that the expenses on the C are truly legitimate business expenses, that belong on the C rather than the A. They are very tough on that issue.

[joanmcq]

You gotta be doing nothing but trading all day, every day, to get day trader status.

[pcmcpa]

You may want to check http://www.fairmark.com/traders/index.htm for a wealth of information on Day Traders.