As a trader I am sure you have heard of the nightmare that the new IRS regulations for reporting on Form 8949 are causing. The form is a result of the new IRS requirements that brokers report the cost basis on your 1099B. In prior years the brokers were only required to report the sales. The problem is that these 1099-B's have large discrepancies with the cost basis that is being calculated by yourself or your CPA.
Our recommendation is to extend your tax return if possible for this tax year. The brokerages need to deal with the discrepancies and send out amended 1099'B's.
Happy Trading!
Courtney Kurisko, CPA
Monday, April 2, 2012
Wednesday, January 25, 2012
Self Employment Taxes
Issue Number: IRS Tax Tip 2012-16
Tax Tips for the Self-employed
NOTE: Day Traders are not subject to SE tax only income tax and if you have not made the 475f election, then capital gains tax(see #2). The information below is from the IRS.GOV web site and I thought it would be useful since most traders are self employed.
There are many benefits that come from being your own boss. If you work for yourself, as an independent contractor, or you carry on a trade or business as a sole proprietor, you are generally considered to be self-employed.
Here are six key points the IRS would like you to know about self-employment and self- employment taxes:
1. Self-employment can include work in addition to your regular full-time business activities, such as part-time work you do at home or in addition to your regular job.
2. If you are self-employed you generally have to pay self-employment tax as well as income tax. Self-employment tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. You figure self-employment tax using a Form 1040 Schedule SE. Also, you can deduct half of your self-employment tax in figuring your adjusted gross income.
3. You file an IRS Schedule C, Profit or Loss from Business, or C-EZ, Net Profit from Business, with your Form 1040.
4. If you are self-employed you may have to make estimated tax payments. This applies even if you also have a full-time or part-time job and your employer withholds taxes from your wages. Estimated tax is the method used to pay tax on income that is not subject to withholding. If you fail to make quarterly payments you may be penalized for underpayment at the end of the tax year.
5. You can deduct the costs of running your business. These costs are known as business expenses. These are costs you do not have to capitalize or include in the cost of goods sold but can deduct in the current year.
6. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.
For more information see the Self-employment Tax Center, IRS Publication 334, Tax Guide for Small Business, IRS Publication 535, Business Expenses and Publication 505, Tax Withholding and Estimated Tax, available at www.irs.gov or by calling the IRS forms and publications order line at 800-TAX-FORM (800-829-3676).
Links:
Publication 334, Tax Guide for Small Business
Publication 535, Business Expenses
Publication 505, Tax Withholding and Estimated Tax
Schedule C, Profit or Loss from Business and instructions
Schedule C-EZ, Net Profit from Business
Schedule SE, Self-Employment Tax and instructions
Form 1040-ES, Estimated Tax for Individuals
Tax Tips for the Self-employed
NOTE: Day Traders are not subject to SE tax only income tax and if you have not made the 475f election, then capital gains tax(see #2). The information below is from the IRS.GOV web site and I thought it would be useful since most traders are self employed.
There are many benefits that come from being your own boss. If you work for yourself, as an independent contractor, or you carry on a trade or business as a sole proprietor, you are generally considered to be self-employed.
Here are six key points the IRS would like you to know about self-employment and self- employment taxes:
1. Self-employment can include work in addition to your regular full-time business activities, such as part-time work you do at home or in addition to your regular job.
2. If you are self-employed you generally have to pay self-employment tax as well as income tax. Self-employment tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. You figure self-employment tax using a Form 1040 Schedule SE. Also, you can deduct half of your self-employment tax in figuring your adjusted gross income.
3. You file an IRS Schedule C, Profit or Loss from Business, or C-EZ, Net Profit from Business, with your Form 1040.
4. If you are self-employed you may have to make estimated tax payments. This applies even if you also have a full-time or part-time job and your employer withholds taxes from your wages. Estimated tax is the method used to pay tax on income that is not subject to withholding. If you fail to make quarterly payments you may be penalized for underpayment at the end of the tax year.
5. You can deduct the costs of running your business. These costs are known as business expenses. These are costs you do not have to capitalize or include in the cost of goods sold but can deduct in the current year.
6. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.
For more information see the Self-employment Tax Center, IRS Publication 334, Tax Guide for Small Business, IRS Publication 535, Business Expenses and Publication 505, Tax Withholding and Estimated Tax, available at www.irs.gov or by calling the IRS forms and publications order line at 800-TAX-FORM (800-829-3676).
Links:
Publication 334, Tax Guide for Small Business
Publication 535, Business Expenses
Publication 505, Tax Withholding and Estimated Tax
Schedule C, Profit or Loss from Business and instructions
Schedule C-EZ, Net Profit from Business
Schedule SE, Self-Employment Tax and instructions
Form 1040-ES, Estimated Tax for Individuals
Sunday, December 12, 2010
Keeping good records- low volume of trades
I am currently involved in an audit with one of my clients and the main issue at stake is whether or not my client had enough trades to qualify as a trader. My client has been a day trader since 2002 and made the 475f election years ago. There is no doubt that my client is a full time trader in my opinion. The taxpayer is in front of the computer 8-10 hours a day looking for setups, researching and trading and the trading income is their only source of income. The issue arises in the year that they traded options and the volume of trades is considerably low.
The client may be able to prove that she has been trading full time even though she only executed trades on 26% of the available trading days because she kept a journal of all trades that she was looking at on a daily basis. She dated the pages and even though the notes are not very presentable to an IRS agent, she does have the daily logs available to submit as evidence that she was in fact working on 95% of the available trading days.
Also in her favor is she was trading only options and perfect setups for options trading are not always available on a daily basis.
The IRS agent is using the court case William G. HOLSINGER and Joann Mickler, Peti-tioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent. No. 15563-06. Aug. 11, 2008. I will post the summary of this case in a second blog entry.
I will you updated as to the outcome of the audit. In the meantime I just wanted to remind traders that the number one variable being looked at to determine if she qualifies as a trader is the volume of trades. I also want to stress that it is important to keep some sort of log on a daily basis.
-Courtney Kurisko, CPA
The client may be able to prove that she has been trading full time even though she only executed trades on 26% of the available trading days because she kept a journal of all trades that she was looking at on a daily basis. She dated the pages and even though the notes are not very presentable to an IRS agent, she does have the daily logs available to submit as evidence that she was in fact working on 95% of the available trading days.
Also in her favor is she was trading only options and perfect setups for options trading are not always available on a daily basis.
The IRS agent is using the court case William G. HOLSINGER and Joann Mickler, Peti-tioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent. No. 15563-06. Aug. 11, 2008. I will post the summary of this case in a second blog entry.
I will you updated as to the outcome of the audit. In the meantime I just wanted to remind traders that the number one variable being looked at to determine if she qualifies as a trader is the volume of trades. I also want to stress that it is important to keep some sort of log on a daily basis.
-Courtney Kurisko, CPA
William G. HOLSINGER and Joann Mickler, Peti-tioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent. No. 15563-06. Aug. 11, 2008
United States Tax Court.
William G. HOLSINGER and Joann Mickler, Peti-tioners
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
No. 15563-06.
Aug. 11, 2008.
Background: Taxpayers petitioned for redetermina-tion of federal income tax deficiencies.
Holdings: The Tax Court, Vasquez, J., held that:
(1) net losses from purchases and sales of securities for two tax years at issue were capital losses and only partially deductible, and
(2) expenses that taxpayers attributed to securities trading activity were not deductible as business ex-penses.
Decision for IRS.
[1] Internal Revenue 220 3396
220 Internal Revenue
220V Income Taxes
220V(I) Deductions
220V(I)3 Losses
220k3396 k. Trade or Business. Most Cited Cases
Taxpayers were investors, rather than traders in secu-rities, and thus, net losses from purchases and sales of securities for two tax years at issue were capital losses and only partially deductible; taxpayers' trad-ing was not substantial, as they traded on less than 40% of trading days in first year and less than 45% of trading days in second year, and taxpayers did not seek to catch swings in daily market movements and to profit from these short-term changes, as they rarely bought and sold on same day, and significant amount of their holdings was held for more than 31 days. 26 U.S.C.A. § 475.
[2] Internal Revenue 220 3396
220 Internal Revenue
220V Income Taxes
220V(I) Deductions
220V(I)3 Losses
220k3396 k. Trade or Business. Most Cited Cases
Because taxpayers' securities trading activity did not rise to level of business of trading securities, ex-penses they attributed to that activity, even if incurred on their corporation's behalf, were not deductible as business expenses. 26 U.S.C.A. § 6001; 26 C.F.R. § 1.6001-1(a).
V. Jean Owens and James S. Eggert, for petitioners.
Stephen R. Takeuchi, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
VASQUEZ, Judge.
*1 Respondent determined deficiencies of $54,462 and $43,423 in petitioners' 2001 and 2002 Federal income taxes, respectively. Respondent amended his answer and increased petitioners' 2001 deficiency by $20,278, for a total 2001 deficiency of $74,740. After concessions by both parties, the issues for decision are: (1) Whether losses from purchases and sales of securities are deductible by petitioners as ordinary losses or are instead subject to the limitations appli-cable to capital losses; and (2) whether expenses at-tributable to those purchases and sales are deductible by petitioners as business expenses or are instead subject to the limitations applicable to itemized de-ductions.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation of facts and the attached ex-hibits are incorporated herein by this reference. At the time they filed the petition, petitioners resided in Florida.
William Holsinger (petitioner) retired in 1992, having worked approximately 30 years for Eli Lilly & Co. In 1999 petitioners married. In 2000 petitioners began buying and selling stocks, earning approximately $280,000 from that source during 2000. Petitioner opened brokerage accounts in his name, using his Social Security number. Petitioners reported their trading FN1 income as capital gains in 2000.
On April 19, 2001, petitioners incorporated Alpha Trading Co. of Sarasota, L.L.C. (Alpha) under the laws of Florida. Petitioner owns 67 percent of Alpha, and petitioner Mickler owns the remaining 33 per-cent. On or about May 17, 2001, Alpha made a timely election pursuant to section 475(f) to use the mark-to-market method of accounting.FN2
Petitioners maintained two trading accounts with E-Trade, two with Options Xpress, and one with Ameritrade-Comdisco. From April 19 until Decem-ber 31, 2001, petitioners executed approximately 289 trades on their various trading accounts. In 2002 peti-tioners executed approximately 372 trades.
In 2001 petitioners claimed an ordinary loss of $180,174 FN3 from Alpha on their 2001 Schedule E, Supplemental Income and Loss. The loss consists of trading losses of $178,870, depreciation of $1,284, and interest of $40. The aggregate cost or other basis of the securities sold in 2001 was $933,147. The sale prices in 2001 collectively were $754,277. Also in 2001 petitioners claimed a net loss of $80,100 on their Schedule C, Profit or Loss From Business. Re-spondent disallowed the $80,100 as business ex-penses but allowed itemized deductions for invest-ment interest of $7,620 and miscellaneous deductions of $72,480. After adjustments for gross income limi-tations, respondent allowed net itemized deductions of $69,153.
In 2002 petitioners claimed an ordinary loss of $45,521. This loss comprises $11,227 in trading losses related to Alpha and $34,294 in claimed busi-ness expenses related to Alpha. Respondent disal-lowed the $34,294 as business expenses but allowed a net itemized deduction of $26,181.
*2 After petitioner incorporated Alpha, he did not switch the name on his trading accounts. Petitioner's Social Security number also remained on the trading accounts. Petitioners continued to trade stocks and options during 2001 and 2002 with the accounts they had used before the incorporation of Alpha. In De-cember 2002 petitioners had one trading account in Alpha's name. During the years in issue petitioners used five accounts to conduct trades.
Petitioners traded from a room in their house. The room contained computers with Internet access in order for petitioners to trade and do research. Addi-tionally, petitioner had four monitors connected to his computer because he wanted to be able to trade and track different investments and potential investments simultaneously. Petitioner purchased the computer equipment around July 1, 2000, before incorporating Alpha. None of the computer equipment was trans-ferred to Alpha.
OPINION
I. Mark-to-Market Election
Respondent concedes that Alpha made a timely mark-to-market election pursuant to section 475(f). Section 475(f) applies only to those engaged in a trade or business as traders in securities. Having made a timely election, if Alpha were a trader in se-curities, it would be eligible to recognize gain or loss on any security held in connection with such a trade or business at the close of any taxable year as if the security were sold at its fair market value on the last business day of the taxable year. See sec. 475(f)(1)(A)(I). In general any gains or losses with respect to the securities, whether deemed sold at year end under the mark-to-market method of accounting or actually sold during the taxable year, shall be treated as ordinary income or loss. Sec. 475(d)(3)(A)(I). If Alpha is considered an investor in securities, the 2001 and 2002 net losses from the pur-chases and sales of securities would be capital losses and only partially deductible to petitioners.
II. Trade or Business
[1] The Internal Revenue Code does not define the term “trade or business” for purposes of section 162. Commissioner v. Groetzinger, 480 U.S. 23, 27, 107 S.Ct. 980, 94 L.Ed.2d 25 (1987); Estate of Yaeger v. Commissioner, 889 F.2d 29, 33 (2d Cir.1989), affg. T.C. Memo.1988-264. Whether activities constitute a trade or business is a question of fact. See Higgins v. Commissioner, 312 U.S. 212, 217, 61 S.Ct. 475, 85 L.Ed. 783 (1941); Estate of Yaeger v. Commissioner, supra at 33; Mayer v. Commissioner, T.C. Memo.1994-209; Paoli v. Commissioner, T.C. Memo.1991-351. Petitioners have neither claimed nor shown that they satisfied the requirements of sec-tion 7491(a) to shift the burden of proof to respon-dent with regard to any factual issue. Accordingly, petitioners bear the burden of proof. See Rule 142(a).
Petitioners argue that they were traders, trading as agents of Alpha. With the incorporation of Alpha, petitioners argue they became traders. In determining whether a taxpayer's trading activity constituted a trade or business, courts have distinguished between “traders” and “investors”. Moller v. United States, 721 F.2d 810, 813 (Fed.Cir.1983); see also Levin v. United States, 220 Ct.Cl. 197, 597 F.2d 760, 765 (1979).
*3 In determining whether a taxpayer is a trader, nonexclusive factors to consider are: (1) The tax-payer's intent, (2) the nature of the income to be de-rived from the activity, and (3) the frequency, extent, and regularity of the taxpayer's securities transac-tions. Moller v. United States, supra at 813. For a taxpayer to be a trader the trading activity must be substantial, which means “ ‘frequent, regular, and continuous enough to constitute a trade or business' “ as opposed to sporadic trading. Ball v. Commissioner, T.C. Memo.2000-245 (quoting Hart v. Commis-sioner, T.C. Memo.1997-11). A taxpayer's activities constitute a trade or business where both of the fol-lowing requirements are met: (1) The taxpayer's trad-ing is substantial, and (2) the taxpayer seeks to catch the swings in the daily market movements and to profit from these short-term changes rather than to profit from the long-term holding of investments. Mayer v. Commissioner, supra.
As to the first requirement, we find petitioners' trad-ing was not substantial. Courts consider the number of executed trades in a year and the amount of money involved in those trades when evaluating whether a taxpayer's trading activities were substantial. See, e.g., Mayer v. Commissioner, supra; Paoli v. Com-missioner, supra. In Paoli, the Court held trading activities were substantial when the taxpayers traded stocks or options worth approximately $9 million. In Mayer, the Court considered over 1,100 executed sales and purchases in each of the years at issue therein to be substantial trading activity. Trading ac-tivity was found to be insubstantial when a taxpayer executed at most 83 purchases and 41 sales in one year and 76 purchases and 30 sales in the second year. Moller v. United States, supra at 813. In 2001 petitioners executed approximately 289 trades. An analysis of petitioners' trading activity reveals that in 2001 they traded on 63 days. This total represents less than 40 percent of the trading days from April 19, 2001, the day petitioners incorporated Alpha, until December 31, 2001. In 2002 petitioners traded on 110 days and executed approximately 372 trades. This total represents less than 45 percent of the trad-ing days in 2002. We find it doubtful whether the trades were conducted with the frequency, continuity, and regularity indicative of a business.
As to the second requirement, petitioners have failed to prove that they sought to catch the swings in the daily market movements and to profit from these short-term changes rather than to profit from the long-term holding of investments. Petitioner testified that his goal in forming Alpha was to profit from short-term swings in the market. Additionally, peti-tioner testified that he usually closed his account at the end of the day and tried to avoid holding stocks and options overnight. The documentary evidence, however, paints a different picture. A list of petition-ers' trades shows they rarely bought and sold on the same day. Furthermore, a significant amount of peti-tioners' holdings was held for more than 31 days. As a result, we find that petitioners have not demon-strated that they sought to capture the daily swings in the market. We find that they were not traders, but investors. Petitioners' trading pattern is consistent with that of an investor, not of a trader.
III. Business Expenses
*4 [2] Deductions are a matter of legislative grace, and the taxpayer has the burden of showing entitle-ment to any deduction claimed. See Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84, 112 S.Ct. 1039, 117 L.Ed.2d 226 (1992). Taxpayers must substantiate amounts claimed as deductions by maintaining the records necessary to establish such entitlement. Sec. 6001; sec. 1.6001-1(a), Income Tax Regs.; see Hradesky v. Commissioner, 65 T.C. 87, 1975 WL 3047 (1975), affd. per curiam 540 F.2d 821 (5th Cir.1976).
Petitioners claimed business deductions for 2001 and 2002. Petitioners argue that their trading activity was on behalf of Alpha, not for themselves as individuals. Petitioners claim they were Alpha's agents and there-fore had the authority to conduct trades on its behalf. Even if petitioners acted on Alpha's behalf, because their activity, as we have already found, did not rise to the level of a business (the business of trading se-curities), the expenses petitioners attributed to that activity, even if incurred on Alpha's behalf, are not deductible as business expenses.
In reaching all of our holdings herein, we have con-sidered all arguments made by the parties, and to the extent not mentioned above, we find them to be ir-relevant or without merit.
To reflect the foregoing,
Decision will be entered under Rule 155.
FN1. The use of the term “trading income” is not a conclusion that petitioners or Alpha were engaged in a business of trading in se-curities.
FN2. Unless otherwise indicated, all section references are to the Internal Revenue Code, and all Rule references are to the Tax Court Rules of Practice and Procedure.
FN3. The 2001 ordinary loss petitioners claimed on Schedule E is $20 less than the total claimed of the trading losses, deprecia-tion, and interest. Both parties have stipu-lated the amounts, and there appears to be no explanation for the $20 discrepancy. The $20 discrepancy has no effect as to the out-come of the case.
U.S.Tax Ct.,2008.
Holsinger v. C.I.R.
T.C. Memo. 2008-191, 2008 WL 3286960 (U.S.Tax Ct.), 96 T.C.M. (CCH) 85, T.C.M. (RIA) 2008-191, 2008 RIA TC Memo 2008-191
END OF DOCUMENT
William G. HOLSINGER and Joann Mickler, Peti-tioners
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
No. 15563-06.
Aug. 11, 2008.
Background: Taxpayers petitioned for redetermina-tion of federal income tax deficiencies.
Holdings: The Tax Court, Vasquez, J., held that:
(1) net losses from purchases and sales of securities for two tax years at issue were capital losses and only partially deductible, and
(2) expenses that taxpayers attributed to securities trading activity were not deductible as business ex-penses.
Decision for IRS.
[1] Internal Revenue 220 3396
220 Internal Revenue
220V Income Taxes
220V(I) Deductions
220V(I)3 Losses
220k3396 k. Trade or Business. Most Cited Cases
Taxpayers were investors, rather than traders in secu-rities, and thus, net losses from purchases and sales of securities for two tax years at issue were capital losses and only partially deductible; taxpayers' trad-ing was not substantial, as they traded on less than 40% of trading days in first year and less than 45% of trading days in second year, and taxpayers did not seek to catch swings in daily market movements and to profit from these short-term changes, as they rarely bought and sold on same day, and significant amount of their holdings was held for more than 31 days. 26 U.S.C.A. § 475.
[2] Internal Revenue 220 3396
220 Internal Revenue
220V Income Taxes
220V(I) Deductions
220V(I)3 Losses
220k3396 k. Trade or Business. Most Cited Cases
Because taxpayers' securities trading activity did not rise to level of business of trading securities, ex-penses they attributed to that activity, even if incurred on their corporation's behalf, were not deductible as business expenses. 26 U.S.C.A. § 6001; 26 C.F.R. § 1.6001-1(a).
V. Jean Owens and James S. Eggert, for petitioners.
Stephen R. Takeuchi, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
VASQUEZ, Judge.
*1 Respondent determined deficiencies of $54,462 and $43,423 in petitioners' 2001 and 2002 Federal income taxes, respectively. Respondent amended his answer and increased petitioners' 2001 deficiency by $20,278, for a total 2001 deficiency of $74,740. After concessions by both parties, the issues for decision are: (1) Whether losses from purchases and sales of securities are deductible by petitioners as ordinary losses or are instead subject to the limitations appli-cable to capital losses; and (2) whether expenses at-tributable to those purchases and sales are deductible by petitioners as business expenses or are instead subject to the limitations applicable to itemized de-ductions.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation of facts and the attached ex-hibits are incorporated herein by this reference. At the time they filed the petition, petitioners resided in Florida.
William Holsinger (petitioner) retired in 1992, having worked approximately 30 years for Eli Lilly & Co. In 1999 petitioners married. In 2000 petitioners began buying and selling stocks, earning approximately $280,000 from that source during 2000. Petitioner opened brokerage accounts in his name, using his Social Security number. Petitioners reported their trading FN1 income as capital gains in 2000.
On April 19, 2001, petitioners incorporated Alpha Trading Co. of Sarasota, L.L.C. (Alpha) under the laws of Florida. Petitioner owns 67 percent of Alpha, and petitioner Mickler owns the remaining 33 per-cent. On or about May 17, 2001, Alpha made a timely election pursuant to section 475(f) to use the mark-to-market method of accounting.FN2
Petitioners maintained two trading accounts with E-Trade, two with Options Xpress, and one with Ameritrade-Comdisco. From April 19 until Decem-ber 31, 2001, petitioners executed approximately 289 trades on their various trading accounts. In 2002 peti-tioners executed approximately 372 trades.
In 2001 petitioners claimed an ordinary loss of $180,174 FN3 from Alpha on their 2001 Schedule E, Supplemental Income and Loss. The loss consists of trading losses of $178,870, depreciation of $1,284, and interest of $40. The aggregate cost or other basis of the securities sold in 2001 was $933,147. The sale prices in 2001 collectively were $754,277. Also in 2001 petitioners claimed a net loss of $80,100 on their Schedule C, Profit or Loss From Business. Re-spondent disallowed the $80,100 as business ex-penses but allowed itemized deductions for invest-ment interest of $7,620 and miscellaneous deductions of $72,480. After adjustments for gross income limi-tations, respondent allowed net itemized deductions of $69,153.
In 2002 petitioners claimed an ordinary loss of $45,521. This loss comprises $11,227 in trading losses related to Alpha and $34,294 in claimed busi-ness expenses related to Alpha. Respondent disal-lowed the $34,294 as business expenses but allowed a net itemized deduction of $26,181.
*2 After petitioner incorporated Alpha, he did not switch the name on his trading accounts. Petitioner's Social Security number also remained on the trading accounts. Petitioners continued to trade stocks and options during 2001 and 2002 with the accounts they had used before the incorporation of Alpha. In De-cember 2002 petitioners had one trading account in Alpha's name. During the years in issue petitioners used five accounts to conduct trades.
Petitioners traded from a room in their house. The room contained computers with Internet access in order for petitioners to trade and do research. Addi-tionally, petitioner had four monitors connected to his computer because he wanted to be able to trade and track different investments and potential investments simultaneously. Petitioner purchased the computer equipment around July 1, 2000, before incorporating Alpha. None of the computer equipment was trans-ferred to Alpha.
OPINION
I. Mark-to-Market Election
Respondent concedes that Alpha made a timely mark-to-market election pursuant to section 475(f). Section 475(f) applies only to those engaged in a trade or business as traders in securities. Having made a timely election, if Alpha were a trader in se-curities, it would be eligible to recognize gain or loss on any security held in connection with such a trade or business at the close of any taxable year as if the security were sold at its fair market value on the last business day of the taxable year. See sec. 475(f)(1)(A)(I). In general any gains or losses with respect to the securities, whether deemed sold at year end under the mark-to-market method of accounting or actually sold during the taxable year, shall be treated as ordinary income or loss. Sec. 475(d)(3)(A)(I). If Alpha is considered an investor in securities, the 2001 and 2002 net losses from the pur-chases and sales of securities would be capital losses and only partially deductible to petitioners.
II. Trade or Business
[1] The Internal Revenue Code does not define the term “trade or business” for purposes of section 162. Commissioner v. Groetzinger, 480 U.S. 23, 27, 107 S.Ct. 980, 94 L.Ed.2d 25 (1987); Estate of Yaeger v. Commissioner, 889 F.2d 29, 33 (2d Cir.1989), affg. T.C. Memo.1988-264. Whether activities constitute a trade or business is a question of fact. See Higgins v. Commissioner, 312 U.S. 212, 217, 61 S.Ct. 475, 85 L.Ed. 783 (1941); Estate of Yaeger v. Commissioner, supra at 33; Mayer v. Commissioner, T.C. Memo.1994-209; Paoli v. Commissioner, T.C. Memo.1991-351. Petitioners have neither claimed nor shown that they satisfied the requirements of sec-tion 7491(a) to shift the burden of proof to respon-dent with regard to any factual issue. Accordingly, petitioners bear the burden of proof. See Rule 142(a).
Petitioners argue that they were traders, trading as agents of Alpha. With the incorporation of Alpha, petitioners argue they became traders. In determining whether a taxpayer's trading activity constituted a trade or business, courts have distinguished between “traders” and “investors”. Moller v. United States, 721 F.2d 810, 813 (Fed.Cir.1983); see also Levin v. United States, 220 Ct.Cl. 197, 597 F.2d 760, 765 (1979).
*3 In determining whether a taxpayer is a trader, nonexclusive factors to consider are: (1) The tax-payer's intent, (2) the nature of the income to be de-rived from the activity, and (3) the frequency, extent, and regularity of the taxpayer's securities transac-tions. Moller v. United States, supra at 813. For a taxpayer to be a trader the trading activity must be substantial, which means “ ‘frequent, regular, and continuous enough to constitute a trade or business' “ as opposed to sporadic trading. Ball v. Commissioner, T.C. Memo.2000-245 (quoting Hart v. Commis-sioner, T.C. Memo.1997-11). A taxpayer's activities constitute a trade or business where both of the fol-lowing requirements are met: (1) The taxpayer's trad-ing is substantial, and (2) the taxpayer seeks to catch the swings in the daily market movements and to profit from these short-term changes rather than to profit from the long-term holding of investments. Mayer v. Commissioner, supra.
As to the first requirement, we find petitioners' trad-ing was not substantial. Courts consider the number of executed trades in a year and the amount of money involved in those trades when evaluating whether a taxpayer's trading activities were substantial. See, e.g., Mayer v. Commissioner, supra; Paoli v. Com-missioner, supra. In Paoli, the Court held trading activities were substantial when the taxpayers traded stocks or options worth approximately $9 million. In Mayer, the Court considered over 1,100 executed sales and purchases in each of the years at issue therein to be substantial trading activity. Trading ac-tivity was found to be insubstantial when a taxpayer executed at most 83 purchases and 41 sales in one year and 76 purchases and 30 sales in the second year. Moller v. United States, supra at 813. In 2001 petitioners executed approximately 289 trades. An analysis of petitioners' trading activity reveals that in 2001 they traded on 63 days. This total represents less than 40 percent of the trading days from April 19, 2001, the day petitioners incorporated Alpha, until December 31, 2001. In 2002 petitioners traded on 110 days and executed approximately 372 trades. This total represents less than 45 percent of the trad-ing days in 2002. We find it doubtful whether the trades were conducted with the frequency, continuity, and regularity indicative of a business.
As to the second requirement, petitioners have failed to prove that they sought to catch the swings in the daily market movements and to profit from these short-term changes rather than to profit from the long-term holding of investments. Petitioner testified that his goal in forming Alpha was to profit from short-term swings in the market. Additionally, peti-tioner testified that he usually closed his account at the end of the day and tried to avoid holding stocks and options overnight. The documentary evidence, however, paints a different picture. A list of petition-ers' trades shows they rarely bought and sold on the same day. Furthermore, a significant amount of peti-tioners' holdings was held for more than 31 days. As a result, we find that petitioners have not demon-strated that they sought to capture the daily swings in the market. We find that they were not traders, but investors. Petitioners' trading pattern is consistent with that of an investor, not of a trader.
III. Business Expenses
*4 [2] Deductions are a matter of legislative grace, and the taxpayer has the burden of showing entitle-ment to any deduction claimed. See Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84, 112 S.Ct. 1039, 117 L.Ed.2d 226 (1992). Taxpayers must substantiate amounts claimed as deductions by maintaining the records necessary to establish such entitlement. Sec. 6001; sec. 1.6001-1(a), Income Tax Regs.; see Hradesky v. Commissioner, 65 T.C. 87, 1975 WL 3047 (1975), affd. per curiam 540 F.2d 821 (5th Cir.1976).
Petitioners claimed business deductions for 2001 and 2002. Petitioners argue that their trading activity was on behalf of Alpha, not for themselves as individuals. Petitioners claim they were Alpha's agents and there-fore had the authority to conduct trades on its behalf. Even if petitioners acted on Alpha's behalf, because their activity, as we have already found, did not rise to the level of a business (the business of trading se-curities), the expenses petitioners attributed to that activity, even if incurred on Alpha's behalf, are not deductible as business expenses.
In reaching all of our holdings herein, we have con-sidered all arguments made by the parties, and to the extent not mentioned above, we find them to be ir-relevant or without merit.
To reflect the foregoing,
Decision will be entered under Rule 155.
FN1. The use of the term “trading income” is not a conclusion that petitioners or Alpha were engaged in a business of trading in se-curities.
FN2. Unless otherwise indicated, all section references are to the Internal Revenue Code, and all Rule references are to the Tax Court Rules of Practice and Procedure.
FN3. The 2001 ordinary loss petitioners claimed on Schedule E is $20 less than the total claimed of the trading losses, deprecia-tion, and interest. Both parties have stipu-lated the amounts, and there appears to be no explanation for the $20 discrepancy. The $20 discrepancy has no effect as to the out-come of the case.
U.S.Tax Ct.,2008.
Holsinger v. C.I.R.
T.C. Memo. 2008-191, 2008 WL 3286960 (U.S.Tax Ct.), 96 T.C.M. (CCH) 85, T.C.M. (RIA) 2008-191, 2008 RIA TC Memo 2008-191
END OF DOCUMENT
Wednesday, September 1, 2010
Wash sale rules
If you are a day trader and have not made the mark to market election 475f, you are subject to wash sales rules. Wash sale rules are as follows, if you sell a security or a contract or option to buy a stock at a loss and then buy the same security within a 30 day period then that loss is disallowed. The time period is 30 days before and after the sale.
The disallowed loss is actually deferred- it is added to the basis of the replacement stock and your holding period for the replacement stock includes the holding period for the security that you sold.
The wash sale rule only applies to losses and does not apply if you have made the mark to market election.
-Courtney Kurisko
Certified Public Accountant
The disallowed loss is actually deferred- it is added to the basis of the replacement stock and your holding period for the replacement stock includes the holding period for the security that you sold.
The wash sale rule only applies to losses and does not apply if you have made the mark to market election.
-Courtney Kurisko
Certified Public Accountant
Monday, April 26, 2010
Self Employment Taxes
Traders that trade securities are not subject to self employment taxes. This applies whether or not you made the 475f election or not.
On a side note, older court cases have dealt with this issue and the tax payer should be aware of this. See the journal of accountancy article: http://www.journalofaccountancy.com/Issues/2001/Jan/DayTradingAndSelfEmploymentTaxes.htm
-Courtney Kurisko, CPA
www.ckaccountingandtaxation.com
On a side note, older court cases have dealt with this issue and the tax payer should be aware of this. See the journal of accountancy article: http://www.journalofaccountancy.com/Issues/2001/Jan/DayTradingAndSelfEmploymentTaxes.htm
-Courtney Kurisko, CPA
www.ckaccountingandtaxation.com
Thursday, February 4, 2010
Visit me at the Traders Expo in NYC Feb 15 & 16th
I will be attending the Traders Expo on Feb 15th and 16th in NYC. Please visit me at me the Day Trading Radio booth #5309.
Courtney Kurisko
CK Accounting Tax Service, LLC
www.ckaccountingandtaxation.com
Courtney Kurisko
CK Accounting Tax Service, LLC
www.ckaccountingandtaxation.com
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