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IRS Requirements for Research, Analysis and Library | |
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Copyright© 2002 & 2003 Colin M. Cody, CPA and TraderStatus.com, LLC, All Rights Reserved. | |
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Don't jeopardize your tax deductions due to sloppy bookkeeping! Have you purchased a couple trading strategy books yet this year to help document your legitimate trader status tax position? When it comes to daytraders, one of the first things an IRS examiner (or his manager) will have thought of when being assigned a new tax audit to handle is that the taxpayer is really not a "Securities Trader." The IRS is very good at attacking Trader Status during an examination of a tax return. Their goal, of course, is to disallow your ordinary losses and limit you to a $3,000 in capital loss for the year and invoke the wash-sale rule against you. Even if you are profitable for the year being examined, they will attack so that your Schedule C expenses will be moved over to Schedule A where they are usually not going to reduce your taxes very much, and again to invoke the wash-sale rule. (Daytraders are notorious for wash sale violations) Of course, once you have elected to file under Trader Status all of your reasonable expenses that you pay for during the year may be deducted in full. But did you know that it goes beyond simply being allowed to deduct expenses -- that you actually should be deducting these types expenses to justify your Trader Status tax filings? Some daytraders think they'll be "conservative" and not deduct office in the home or continuing education expenses. They think that this will show that they are not being too greedy and that this will result with the IRS leaving them alone. Ahh! but nothing could be further from the truth! A Trader needs to maintain (and have the appearance of) a legitimate business perspective. That means that appropriate books and records need to be kept. A professional trading station area and office area needs to be provided (take a few pictures of your trading station once each year). Continuing education and technical research is needed to be purchased (i.e. not just internet & email free-bees or borrowing from friends) to show that your Securities Trading is an active, serious business operation and not just a simple pastime or passive investment activity. 
 When you are audited you need to show that you are involved in a serious business by providing proof of spending some real money on ongoing education and research, and not rely solely on free internet searches or fee-based chat rooms. Purchases are needed a couple times during the year of Seminars, Books, Tapes and Specialized Software that complement a trader's activities. These should include technical analysis, chart reading, market movements, and not necessarily include studies of fundamentals, financial statement analysis or other long-term investment analysis. Even when you don't really have the time to take a whole day off to go to a daytrading seminar, you can always purchase a few technical daytrader books each year from Amazon.com or our own TraderStatus.com book store or from any of the other links on this webpage. Having payment receipts for daytrader research materials including books, tapes and software is helpful to prove your legitimate Trader Status tax position. It shows that you are serious about spending your money appropriately to support your trading business. Please help support the costs to maintain this web site and spend a few bucks to help yourself by making these IRS necessary purchases through one of the links on this page!
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Last updated:
September 21, 2008 |
