If you are an individual who buys and sells securities you may qualify as a “trader in securities,” for tax purposes. This post attempts to explain how traders must report the income and expenses from being in the trading business.
First it is important to understand the meaning of the terms: “security,” “investor,” “dealer,” and “trader,” and the different manner in which income and expenses are reported.
Internal Revenue Code Section 1236 defines “security” basically for all intents and purposes as any share of stock in any corporation, certificate of stock or interest in any corporation, note, bond, debenture, or evidence of indebtedness, or any evidence of an interest in or right to subscribe to or purchase any of the above.
“Investors” typically buy and sell securities and expect income from dividends, interest, or capital appreciation. If you are an investor you tend to buy securities and hold them for personal investment; generally speaking you are not conducting a trade or business. Most investors are individuals. Sales of these securities result in capital gains and losses that must be reported on Form 1040, Schedule D (PDF), Capital Gains and Losses and on Form 8949 (PDF), Sales and Other Dispositions of Capital Assets, as appropriate. Investors are subject to the capital loss limitations described in IRC 1211(b), in addition to the IRC 1091 wash sales rules. Read more