So You Want to Be a Trader?

About 15 years ago or so, a friend of mine told me about a stock. He said it can’t miss.  So I looked up the company and saw it was manufacturing parts for the Palm Pilot.  I decided to invest and within 24 hours I had sold the stock and made a 100% return on my investment. I was a “day trader.”  I started reading books on day trading, and by making some small purchases I made a few dollars. This seemed so easy, so I started to increase my investments. Now back in the mid 90’s the internet wasn’t what it is today and stock prices were quoted with a 15 minute delay, but that wasn’t going to stop me. I was working in an accounting firm but thought, “Once I get this down, I will quit my job, move to the west coast and day trade.”  The market opens and closes early on the west coast.  All was good in my mind.  Well, as you can see from this blog, I am still in public accounting.  Never made it to the west coast.  I am $40,000 poorer from the experience and learned a valuable lesson – I am a good CPA but a terrible investor.  I am still attracted to the securities industry, but I’ll stick on the accounting and consulting side.

I asked one of my partners, Robert Demmett, who works in our New York office to give me a list of tax benefits of being a trader, which is shown below.   In future blogs we will expand on these areas to give a more in-depth understanding.

 A trader is defined as someone who:

  1. Buys and sells securities in frequent and continuous operations
  2. Trades for his or her own account
  3. Short term trading
  4. Earns income from the daily movement in prices of securities and not from dividends and interest
  5. Pursues the activity to generate a livelihood

Tax Benefits of a Securities Trader:

  1. Gains and losses from the trading of securities are treated as income or loss from the sale of a capital asset
  2. Treated as being in a trade or business, therefore, expenses incurred in connection with trading activity are deducted from Adjusted Gross Income (except commissions on purchases or sales of securities are added to the basis of the securities)
  3. Gains or losses from the disposition of securities are not considered self employment income
  4. Interest expense incurred to trade securities is not subject to the investment interest expense limitation

 Robert Demmett can be reached at 212.829.3210 or rdemmett@withum.com.

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