Trader in Securities

The most important question a trader needs to ask is: do I qualify as a trader in securities? Why? Because it will allow the trader to treat his or her trading activity as a business and write off all ordinary, necessary and reasonable expenses associated with trading. It will also allow the trader to elect MTM accounting and to deduct trading losses in full without being limited by the $3,000 capital loss rule. Sounds great right? What is the alternative tax status to being a "trader"? The IRS has decided the default tax status is an "investor". This status limits your ability to deduct your trading expenses and excludes altogether items like education, travel, home office and more. You will also be limited to claiming only $3000 worth of losses every year. This investor status does not seem so appealing, right? Remember, you have the choice to file as a trader in securities. So what does it take to qualify as a trader in securities?

How can I qualify as a trader in securities?


One of the most common questions traders ask us is: should I incorporate? Then there are the follow up questions about which entity is the best one: LLC, Corporation, S-Corporation or perhaps a partnership. What state should it be in? Delaware or maybe Nevada? Should I include my spouse as an owner? Do I need to pay myself a salary? Can I hire my kids?

As you can see there are many questions and many options available. The answers vary based on your personal circumstances and there isn’t a cookie cutter approach that applies to all.

Generally speaking, you don’t necessarily need to incorporate to qualify as a trader in securities. You can file as a sole proprietor. It is a simple and cost effective solution. However, there are many disadvantages to this strategy such as increased exposure to IRS audit, higher exposure to personal financial risk as your trading activity is not protected from personal liability, inability to contribute to retirement plans or write off your medical premiums as a business expense.

Entities provide solutions to the disadvantages of the sole proprietorship. There are also costs and management expenses to balance the rewards of trading through a business entity. For many, the entity benefits outweigh the risks and uncertainty of a sole proprietorship. So the question we can discuss with you is not why should you form a legal entity, but why wouldn’t you?


Traders can benefit by using Mark to Market accounting.

One of the first decisions a trader needs to make is what accounting method to use to report their trading activity. The default accounting method is cash accounting however many traders can benefit by electing the mark to market accounting method.

So what is mark to market accounting? What are the benefits of electing this method? MTM refers to a year-end process where you mark all your open positions to market prices. Essentially, you are calculating the sale of all open positions at year-end using the closing price of the last day of trading in that year. This accounting method is available only for those who can qualify as a trader in securities and must be made by April 15.

Now to the benefits, MTM trading gains and losses are considered ordinary gains and losses. This is an amazing benefit as it means that trading losses may be deducted in full against any type of income. Ordinary business losses can also generate net operating losses (NOL) that may be carried back up to five years for immediate tax refunds. You are not limited by the $3,000 capital loss limitation that applies to cash method taxpayers and if you are new to trading, you may experience losses larger than $3,000 and you would like to be able to utilize all your losses in the year you incurred them so you can get your refund back from Uncle Sam fast enough to increase your reduced capital in your trading account.

Profitable traders also benefit by electing MTM, they are exempt from the burdensome wash sale loss deferrals rules that apply to non-MTM traders. For example, you may be profitable for the year, but have hundreds of wash sale transactions during the year. You would not be able to include those in your profit/loss calculation, thus increasing your tax liability substantially.

Should securities traders elect MTM? As you can see, MTM offers many advantages like deducting your trading losses as ordinary losses rather than restricted capital losses. Capital losses may not be carried back for individuals, but MTM can be carried back. MTM also offers a way out of dealing with wash sale rules, saving you time and money.


With the economy on a never-ending rollercoaster, the stability of our golden years is uncertain. No matter where you are in your life cycle, there are tax effective ways to start saving for or better manage your retirement funds. Not sure if it is worth it? Think again.

Tax effective retirement plans may also offer other benefits like matching contributions from your employer or if you are self employed from your company. All earnings are tax deferred or tax free depending if your plan is traditional or Roth. In traditional plans your contributions are tax deductible and reduce your tax liability.

How do you decide which the most tax effective plan for you? Do you know which type of plan will offer you the ability to control and protect your funds the best way? Are you aware that some plans will allow you to invest in alternative investments like real estate and gold? Are you looking for some flexibility in your accounts with minimal penalties?

OTA Tax Pros we can discuss with you:

  • The variety of tax breaks and strategies available to individuals and business owners for retirement planning
  • The differences between traditional and Roth IRAs and 401K plans
  • How to take greater control of your retirement investments with a Self-Directed 401K
  • The best tax effective ways to protect your retirement investments.


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