How to Qualify for Trader Tax Status?Posted on April 28th, 2021
Posted by Muhammad Akram, CPA
Trader Tax Status (TTS) is not easy to qualify. There is no statutory law with objective tests for trader tax eligibility. Subjective court case law requires a two-part test:
- Taxpayers’ trading activity must be substantial, regular, frequent, and continuous.
- A taxpayer must seek to catch swings in daily market movements and profit from these short-term changes rather than profiting from long-term holding of investments.
Who is eligible for Trader Tax Status?
Following factors should be considered in case the IRS look into your trading history or style:
- Volume: Akram recommends an average of four trades per day, four days per week, 16 trades per week, 60 a month, and 720 per year on an annualized basis. Count each open and closing trade separately.
- Frequency: Execute trades on close to four days per week, around a 75% frequency rate.
- Holding period: Average holding period must be 31 days or less. That’s a bright-line test.
- Avoid sporadic lapses: A trader has few to no intermittent stoppages in the trading business during the year.
- Intention: Has the intention to run a business and make a living. It doesn’t have to be your primary living.
- Trades full-time or part-time: Part-time and money-losing traders face more IRS scrutiny, and individuals face more scrutiny than entity traders.
- Hours: Spends more than four hours per day, almost every market day, working on his trading business.
- Operations: Has significant business equipment, education, business services, and a home office.
- Account size: Securities traders need to have $50,000 in their brokerage account. For the minimum account size, we like to see not less than $25,000.
Who Doesn’t Qualify for Tax Trader Status?
Trading activity in non-taxable retirement accounts doesn’t count for purposes of TTS qualification. A computerized trading service (ATS) with little to no trader involvement doesn’t qualify for TTS. Trade copying is similar to using a canned ATS or outside adviser, where the copycat trader might not qualify for TTS on those trades. Hiring an investment adviser or commodity trading adviser (CTA) to trade one’s account doesn’t count toward TTS qualification.
Contact Us Today!
Akram can help you determine your eligibility if you qualify for trader tax status.