Home Order more Information |
|||
Planning, Review & Preparation Electing Mark-to-Market Trading through an entity Trader definitions Tax information & news Discussion Board, F.A.Q., Futures, Benefit Plans & other info Search this site add text to search window |
Copyright© 1999, 2000, 2001 & 2002 Colin M. Cody, CPA and TraderStatus.com, LLC, All Rights Reserved. | |
Most taxpayers are classified as investors. Online investors are responsible for 37% of all retail stock trading1. An investor is someone who buys and sells securities with the idea of realizing income in the form of interest, dividends and hopefully, capital gains from an appreciation in value over some period of time. An investor's investment activity usually is not his sole source, or even his main source, of income. It is generally a passive activity. On the other hand, an investor may maintain an office and incur substantial expenses for advice, information, on-line services, record keeping, etc. for the purposes of managing his large and active portfolio. While an investor's active management of the portfolio may result in his obtaining most of his income from the investments, this has no effect on his Investor Status. It is the character of the financial securities which he buys and the amount of selling activity that he engages in with respect to them that determines his tax status. Example of an Investor Status taxpayer: A taxpayer's principal daily activity consisted of buying at low prices the stock of companies in financial trouble which his thorough and time-consuming analysis indicated would likely be turned around, permitting him to eventually realize long-term gains. Despite the significant amount of time and effort devoted to this and the large amount of funds invested in the transactions, the Tax Court held that he was not a trader but was actually an investor. (Yaeger v. Comr.) Definition of an Investor
WHAT'S NOT
DEDUCTIBLE
From IRS Publication #550 "Investment income and Expenses"
The at-risk rules and passive activity rules are explained briefly in this section. The limit on investment interest is explained later in this chapter under Interest Expenses. The 2% limit is explained later in this chapter under Expenses of Producing Income. At-risk rules. Special at-risk rules apply to most income-producing activities. These rules limit the amount of loss you can deduct to the amount you risk losing in the activity. Generally, this is the amount of cash and the adjusted basis of property you contribute to the activity. It also includes money you borrow for use in the activity if you are personally liable for repayment or if you use property not used in the activity as security for the loan. For more information, see Publication 925. Passive activity losses and credits. The amount of losses and tax credits you can claim from passive activities is limited. Generally, you are allowed to deduct passive activity losses only up to the amount of your passive activity income. Also, you can use credits from passive activities only against tax on the income from passive activities. There are exceptions for certain activities, such as rental real estate activities. Passive activity. A passive activity generally is any activity involving the conduct of any trade or business in which you do not materially participate and any rental activity. However, if you are involved in renting real estate, the activity is not a passive activity if both of the following are true.
The term "trade or business" generally means any activity that involves the conduct of a trade or business, is conducted in anticipation of starting a trade or business, or involves certain research or experimental expenditures. However, it does not include rental activities or certain activities treated as incidental to holding property for investment. You are considered to materially participate in an activity if you are involved on a regular, continuous, and substantial basis in the operations of the activity. Other income (nonpassive income). Generally, you can use losses from passive activities only to offset income from passive activities. You generally cannot use passive activity losses to offset your other income, such as your wages or your portfolio income. Portfolio income includes gross income from interest, dividends, annuities, or royalties that is not derived in the ordinary course of a trade or business. It also includes gains or losses (not derived in the ordinary course of a trade or business) from the sale or trade of property (other than an interest in a passive activity) producing portfolio income or held for investment. This includes capital gain distributions from mutual funds and real estate investment trusts. You cannot use passive activity losses to offset Alaska Permanent Fund dividends. Expenses. Do not include in the computation of your passive activity income or loss:
However, this interest and other expenses may be subject to other limits. These limits are explained in the rest of this chapter. Additional information. For more information about determining and reporting income and losses from passive activities, see Publication 925.
The same taxpayer could be considered an investor with
respect to a portion of his activities, and a trader or
dealer with respect to another portion. For IRS tax
purposes, however, the person's status is usually
determined based on his overall activity unless there is
carefully documented segregation of the activities.. |
||
Last updated: January 20, 2014 visitors since January 2014TraderStatus™, TradersTaxPlan™, TradersAdvantage™, TraderStatus.com™, TradersTaxPlan.com™, TradersAdvantage.com™, DoYourOwnDaytraderTaxes™, DoYourOwnTaxes™, DoingYourOwnTaxes™, DoYourOwnDaytraderTaxes.com™, DoYourOwnTaxes.com™, DoingYourOwnTaxes.com™, DoYourTaxesOnline™, DoYourOwnTaxesOnline™, DoYourTaxesOnline.com™, and DoYourOwnTaxesOnline.com™ are trademarks and service marks of Colin M. Cody, CPA and TraderStatus.com, LLC, Trumbull Connecticut Copyright© 1999, 2000, 2001 & 2002 Colin M. Cody, CPA and TraderStatus.com, LLC, All Rights Reserved |