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Since brokerage firms are required to send out monthly statements and year-end 1099-B’s (and soon to be required cost basis), record keeping should not be an issue for anyone. In addition, detailed records must be maintained indicating that trading activities were performed in a business-like manner. There is still a lot of work to be done to educate the IRS in this area. If you are monitoring the markets every day and waiting for your particular technical setup to ocurr, you are actively in the business of trading. I don’t think there is a “one size fits all” percentage of days in the market that all traders can rely on for this IRS test. They are waiting for certain short-term technical chart patterns to form before they strike. For example, I have clients that qualify as active traders that have substantial trading activities that are not in the markets every day. Unfortunately, their are different styles of trading that require different percentage of days in the market. Holsinger’s trades were less than 40% of the trading days in one year and 45% in the second year. Commissioner, TC Memo 2008-191, one of the reasons that the IRS ruled against the taxpayers was because their trading activity was not sufficiently substantial. There must be continuous, repititious, and regular activity spent in one”s trading business. In this final test, the IRS is concerned with the extent to which a taxpayer pursues their trading activity to produce income for their livelihood and the amount of time devoted to the activity. An active trader must carry on the activity with continuity and regularity.if you haven’t then you have not yet demonstrated that you have a legitimate trading business. Most active traders have have at least $50,000 – $100,000 in a trading acount and have invested significant sums of money on trading books, charting software, seminars and computer equipment. It’s tough to justify substantial activity with an account of $25,000 or less. A full-time trader must be trading daily or almost daily and have a sufficient amount of equity in a direct-access or online brokerage account to have an opportunity to earn enough profits to pay his or her expenses and support ones lifestyle. The definition of substantial includes words such as material, significant, fairly large, considerably, belonging to substance, strong, firm, solid, corporeal, etc. Substantial can mean something different for every trader. What does “substantial” mean? This is a very subjective test.
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For this test, the IRS is again focused on the frequency of trades and the financial committment made by the taxpayer to his trading business.
Protrader out of business code#
Since the Internal Revenue Code does not define the term “trader” or “investor”, taxpayers must rely on facts and circumstances described in previous IRS court decisions. To be considered an active trader for income tax purposes an individual must meet special rules established by the IRS. Traders are defined as taxpayers who are in the business of buying and selling securities, options, commodities, futures and foreign exchange currencies for their own accounts.