Traders in Securities

You are a trader in securities if you are engaged in the business of buying and selling securities for your own account. To be engaged in business as a trader in securities, all of the following statements must be true.

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.

You must carry on the activity with continuity and regularity.

The following facts and circumstances should be considered in determining if your activity is a business.

Typical holding periods for securities bought and sold.

The frequency and dollar amounts of your trades during the year.

The extent to which you pursue the activity to produce income for a livelihood.

The amount of time you devote to the activity.

You are considered an investor, and not a trader, if your activity doesn’t meet the above definition of a business. It doesn’t matter whether you call yourself a trader or a “day trader.”

Like an investor, a trader must generally report each sale of securities (taking into account commissions and any other costs of acquiring or disposing of the securities) on Form 8949 unless one of the exceptions described in the Instructions for Form 8949 applies. However, if a trader previously made the mark-to-market election (explained below), each transaction is reported in Part II of Form 4797 instead of on Form 8949. Regardless of whether a trader reports their gains and losses on Form 8949 or Form 4797, the gain or loss from the disposition of securities isn’t taken into account when figuring net earnings from self-employment on Schedule SE. See the Instructions for Schedule SE for an exception that applies to section 1256 contracts.

The limitation on investment interest expense that applies to investors doesn’t apply to interest paid or incurred in a trading business. A trader reports interest expense and other expenses (excluding commissions and other costs of acquiring or disposing of securities) from a trading business on Schedule C (instead of Schedule A).

A trader may also hold securities for investment. The rules for investors will generally apply to those securities. Allocate interest and other expenses between your trading business and your investment securities.