For those of you who deal with the subject, you may be interested in the latest Tax Court decision that determined the t/p was not in a trade or business.
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Day Trader or Investor
Aug 30, 2013
3 Replies
"We have held that trading is substantial when a taxpayer executed
1,136 trades in a year." Seems very arbitrary. It averages to about 5 trades per day, is that right?They say that selling stocks worth $15M per year (although profits are much less) is substantial.
They also say to to be a trader you have to catch daily swings in the market. But holding stocks for 31 days means you are catching swings.
They are also assessing the 20% accuracy penalty for understatement of income. Seems a bit harsh to me.
This was one of the 3 factors in the referenced case. I have not read the referenced case.
No, they said it was considerable, not substantial.
?managing a large amount of money is not conclusive as to whether petitioner?s trading activity amounted to a trade or business.? And, it is only one of the 3 factors of the substantial test.
In determining whether a taxpayer?s trading activity is substantial, the Court considers the number of executed trades in a year, the amount of money involved in those trades, and the number of days that trades were executed.
Not according to Tax Court rulings:
In Holsinger v. Commissioner, 2008 Tax Ct. Memo LEXIS 187, at *9, we held that the taxpayer did not seek to catch the swings in the daily market because a significant amount of his stock was held for more than
31 days. Similarly, in Kay v. Commissioner, 2011 Tax Ct. Memo LEXIS 156, at *10-*11, we held that the taxpayer was not a trader because most of his stocks were held for over 30 days. During the years at issue petitioner held his stocks on average for 35 days, with some stocks being held for over four years. Petitioner?s average holding period of 35 days demonstrates that he was not attempting to catch and profit from the swings in the daily market.As to the penalty:
Petitioners? Federal income tax returns for the years at issue were prepared by a tax return preparer. Petitioners did not call the tax return preparer as a witness. Furthermore, petitioners did not establish that the tax return preparer was a competent professional with sufficient expertise to justify reliance. As a result, petitioners have not proven reasonable cause by good-faith reliance on the advice of a professional.
Overall, they said he failed the activity test in 2006 and 2007 because his trading was not substantial. For 2008, they agreed that the number of trades met one factor;
There is a typo in my original, I was thinking "holding stocks for more than 31 days means you NOT are catching swings" but failed to write the word NOT.
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