A recent case came down showing how not to obtain traders status. Stanley C. Cameron v. Commissioner emphasized what most tax advisers know about active trader status, you must treat your “trading” as a business.
In this case, the taxpayer received an insurance settlement of $71,000 and decided to quit their day job to make it as a trader. The challenge is that they weren’t active enough in their trading to convince the IRS that they truly were a business.
In 2002, Mr. Cameron had 46 purchases and 12 sales of securities. Hardly the 300 trades that the IRS has mentioned in previous advice. In 2003, he completed 109 purchases and 103 sales, never traded more than 5 days a week, and in fact only traded 10 days in a month twice.
Because of the lack of activity, the court denied his status as a “trader in securities” and thus disallowed his business expenses.
Bottom line: Previous cases tell you all you need to know. You need substantial trading activity, (Probably more than 300 trades a year), the trading needs to be continuous, not just 2 days out of the week, and it needs to be the pursuit of profit from short term trades.
