Important Ruling for Stock Traders

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There are a lot of special rules for people who buy and sell stocks. If you have a gain, it’s probably a short term or long-term capital gain. Short-term capital gain means it is taxed like ordinary income. Long-term capital gain gets special tax treatment.

If you have a loss, you’re limited to an offset to capital gains plus $3,000 per years.

So if you have a really bad year and lose $100,000 in the stock market, it could take you over 30 years to fully deduct that loss.

Also, if you have expenses associated with trading stocks such as a home office, software, computer and the like, these are considered investment expenses. Investment expenses are deductible only to extent of investment income such as interest income, dividend income and capital gains. Otherwise, the losses are suspended for some future date when you have investment income.

Imagine if you could treat stock trading like a business!

Well, there is a loophole for a very specific group of people on this. They are called ‘active traders’.

There are three criteria for being considered an active trader. You must have regular trades, hold for short time period and have a substantial number of trades throughout the year.

A recent Tax Court case said that frequent buying and selling wasn’t the only criteria. The Tax Court said that the holding period of the securities was key. This related to a case of a Wall Street trader who began trading his own account. Over 8 ½ months he made 189 trades and lost almost $1.5 mill. He always held stocks for over a day, so didn’t qualify as an active, day trader. The Tax Court said that this was a capital loss and so he only got to take the deduction at $3,000 per year…. In other words he has 500 years of deductions.

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One Comment

  1. Bruce Blauberg says:

    Are you saying here that if a stock trader (specifically a “day trader”) or someone that buys and sells a stock or stocks within a given day, qualifies to take a loss greater than the $3,000 per year?

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