Support you Deserve

We offer a broad range of services to help you secure a sound financial future. You've worked hard to get where you are. You deserve a firm that works hard for you.

Trader Court Cases

Unfortunately, the IRS offers no clear definition of what classifies someone as a trader or an investor for tax purposes. Most of the guidance we have comes from the court cases over the years.  Knowing the rulings on the past cases can help you understand what does and does not qualify for trader tax status in the eyes of the IRS.

The following are some of the more important cases dealing with trader tax status. I have included the important take aways from each case.

Moeller vs. United States (1983)

Joseph and Dorothy Moeller were retired and relied almost entirely on the income derived from their investments for income. Here are the facts of their case:

  • Managed 4 portfolios valued at about $14,000,000
  • Had full management control of all portfolios
  • Each spent about 40 hours a week on investment activities
  • 1976 - 83 security transactions
  • 1977 - 76 security transactions
  • 1976 average holding period: 3 years 4 months
  • 1977 average holding period: 8 years
  • Primary interested in dividends and interest (98% of their gross income in 1976 & 1977)
  • 1976 income from sale of securities: $612
  • 1977 income from sale of securities: loss of $223

Needless to say, the Moellers lost their case. They were not looking to profit from short term price movements in the market (average holding periods and focus on income producing investments) so trader status was denied.

Stephen A. Paoli (1991)

In 1982, Stephen had 326 transactions: Here are the other facts the courts looked at in this case:

  • 63% of his trades were held less than 30 days
  • 40% of his trades were made during a one month period
  • 71% of his trades were made over four months
  • Only made 1 trade in October
  • Made no trades in November and December

Stephen lost his case because his trading was not continuous through out the year. He maintained that he spent 4 to 5 hours every day to trading and studying the market even though he didn't trade. The court did not believe him because he could not provide documentation (this is why we recommend keeping a trading log or journal every day).

Fredrick Mayer (1994)

Fredrick Mayer sold an oil drilling company in June 1980 for $134 million. He formed a corporation called "Captiva" to manage his money. "Captiva" was to be a manager of managers. The years in question were 1986-1988. Here are the facts of his case:

  • Stated Objective: Preservation of Capital
  • 1986: 1140 trades & gross receipts of $16,636,674 ($7,501,905 gain)
  • 1986 average holding period: 317 days
  • 1987: 1569 trades & gross receipts of $18,506,218 ($4,308,066 gain)
  • 1987 average holding period: 439 days
  • 1988: 1136 trades & gross receipts of $14,547,758 ($535,917 gain)
  • 1988 average holding period: 415 days

Mr. Mayer lost his trader status due to hiring outside money managers to manage his portfolio. The average holding periods also showed that he was interested in long term growth. The tax courts ruled in favor of the IRS and Mayer was taxed as an investor.

Rudolph Steffler (1995)

The tax court questioned whether or not the pattern of trading was frequent, regular, and continuous enough to constitute a business. Here are the facts of the Steffler case:

  • Made 5 trades in 1985
  • Made 8 trades in 1986
  • Made 14 trades in 1987

Trading 27 times over a 3 year period was not enough activity in the courts eyes to grant trader status. Steffler was taxed as an investor.

So What Does The IRS Look For?

According to IRS Tax Topic 429 (Traders In Securities):

  • You must seek to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation
  • Your activity must be substantial AND
  • You must carry on the activity with continuity and regularity

The IRS focuses on four areas when granting trader status:

  1. Typical holding periods for securities bought and sold
  2. Frequency and dollar amount of your trades during the year
  3. Extent to which you pursue the activity to produce income for a livelihood
  4. Amount of time you devote to the activity

Miss one of those four and you will be denied trader tax status and will be taxed as an investor.

If you are not sure if you qualify for trader status or not, fill out our free Trader Evaluation form and scan and email it to us at info@shrinkmytaxes.com

 


What Others Say

"You guys rock! The service was excellent. Thank you for making it painless, pleasant and most of all hassle free!"

"I have gotten at least 50 times the value from Guardian Accounting Group. Thanks for the great service. It's exactly what I've been looking for."

"Thanks guys, keep up the good work! No matter where you go, Guardian Accounting Group is the best, most professional Accounting Firm firm around! I'd be lost without them."