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Sunday, September 29, 2013

WSJ: Investors Face Long Odds in Qualifying for 'Trader' Status for Tax Purposes

Wall Street Journal Tax Report:  Are You a 'Trader' to Your Country?, by Laura Saunders:

Traders can realize many more tax breaks than mere investors—but a new ruling makes it harder to reach that exalted status.

For investors, it's a dream come true: Qualifying as a "trader" under the tax code brings wondrous benefits.

Expenses such as margin interest, home-office costs and continuing education can become fully deductible; otherwise, they are not deductible or subject to high hurdles. Both payroll taxes and the alternative minimum tax often are lower, and it might be possible to use trading losses to shelter more than $3,000 a year of ordinary income—such as interest or wages—which is the limit for most people.

Traders, according to tax rules, must "seek to profit from daily market movements" and trading must be substantial, continuous, and regular, among other requirements.

For many investors, though, achieving trader status is all too elusive—as a recent taxpayer loss in U.S. Tax Court shows. The case, Thomas A. Endicott v. Commissioner, [T.C. Memo. 2013-199 (Aug. 28, 2013),]  is now part of "a long line of decisions showing the near-impossibility of attaining trader status," says Robert Willens, an independent tax specialist in New York.

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