Is there any publication that explains the proper way to file a Schedule C as a day trader?

Publication 550 (PDF), Investment Income and Expenses, which is specific to traders, includes a section titled Special Rules for Traders in Securities.

Internal Revenue Code section 475(f) and Revenue Procedure 99-17 apply only to traders who elect to use mark-to-market method of Accounting.

References:

• Publication 550 (PDF), Investment Income and Expenses
• Publication 535 (PDF), Business Expenses
• Form 3115 (PDF), Application for Change in Accounting Method
• Internal Revenue Code section 475(f)
• Revenue Procedure 99-17

I am a stock day trader. I understand I have the option of electing the mark-to-market method of accounting which would preclude the application of the wash sale rule. What forms and publications do I need?

If your trading activity is a business, your trading expenses would be reported on Form 1040, Schedule C (PDF), Profit or Loss from Business (Sole Proprietorship) instead of Form 1040, Schedule A (PDF), Itemized Deductions. Your gains or losses, however, would be reported on Form 1040, Schedule D (PDF), Capital Gains and Losses, unless you file an election to change your method of accounting to the mark-to-market method of accounting.

See Publication 550 (PDF), Investment Income and Expenses (p. 63) for guidance on how to make the mark-to-market election. You need Form 3115 (PDF), Application for Change in Accounting Method. The mark-to-market method of accounting cannot be revoked without the consent of the Secretary.

If you qualify and elect to change to the mark-to-market method of accounting, you would report your gains or losses on Part II of Form 4797 (PDF), Sales of Business Property.

References:

• Publication 550 (PDF), Investment Income and Expenses
• Publication 535 (PDF), Business Expenses
• Form 3115 (PDF), Application for Change in Accounting Method
• Form 4797 (PDF), Sales of Business Property
• Procedure 99-17
• Revenue Procedure 99-49

I have expenses associated with my day trading business, but I am unsure about how to report my gains and losses. How do I file as a day trader and how do I use the mark-to-market accounting method?

Special rules apply if you are a trader in securities in the business of buying and selling securities for your own account. To be engaged in business as a trader in securities, you must meet all the following conditions.

• 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 securities trading business.

• Typical holding periods for securities bought and sold
• The frequency and dollar amount 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.

If your trading activity is a business, your trading expenses would be reported on Form 1040, Schedule C (PDF), Profit or Loss from Business (Sole Proprietorship) instead of Form 1040, Schedule A (PDF), Itemized Deductions. Your gains or losses, however, would be reported on Form 1040, Schedule D (PDF), Capital Gains and Losses, unless you file an election to change your method of accounting.

If you qualify for and elect to change to the mark-to-market method of accounting, you would report both your gains or losses on Part II of Form 4797 (PDF), Sales of Business Property.

The mark-to-market method of accounting cannot be revoked without the consent of the Secretary. Though there is no publication specific to day traders, the details for traders in securities and commodities are covered in Internal Revenue Code section 475(f) and Revenue Procedure 99-17.

If you elect to use the mark-to-market method of accounting, a security that you hold at the end of the tax year will generally be treated as sold at its fair market value on the last business day of the tax year. Any gain or loss must be recognized. That gain or loss is taken into account as an adjustment in figuring your gain and loss when you later dispose of the security. See Publication 550 (PDF), Investment Income and Expenses, for general information on mark-to-market accounting rules.

References:

• Publication 535 (PDF), Business Expenses
• Publication 550 (PDF), Investment Income and Expenses
• Form 3115 (PDF), Application for Change in Accounting Method
• Form 4797 (PDF), Sales of Business Property
• Internal Revenue Code Section 475(f)
• Revenue Procedure 99-17

I am a day trader. How do I go about paying tax on the gain as a business and not on Schedule D?

Special rules apply if you are a trader in securities in the business of buying and selling securities for your own account. To be engaged in business as a trader in securities, you must meet all the following conditions.

• 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 securities trading business.

• Typical holding periods for securities bought and sold.
• The frequency and dollar amount of your trades during the year.
• The extent to which you to produce income for a livelihood.
• The amount of time you devote to the activity.

If your trading activity is a business, your trading expenses would be reported on Form 1040, Schedule C (PDF), Profit or Loss from Business (Sole Proprietorship) instead of Form 1040, Schedule A (PDF), Itemized Deductions. Your gains or losses, however, would be reported on Form 1040, Schedule D (PDF), Capital Gains and Losses, unless you file an election to change your method of accounting.

If your trading activity is a business and you elect to change to the mark-to-market method of accounting, you would report both your gains or losses on Part II of Form 4797 (PDF), Sales of Business Property.

The mark-to-market method of accounting cannot be revoked without the consent of the Secretary. Though there is no publication specific to day traders, information for traders in securities and commodities is in Internal Revenue Code Section 475(f) and Revenue Procedure 99-17, Revenue Procedure. 99-49, and Publication 550 (PDF), Investment Income and Expenses.

For details about not-for-profit activities, refer to Chapter 1 in Publication 535 (PDF), Business Expenses. That chapter explains how to determine whether your activity is carried on to make a profit and how to figure the amount of loss you can deduct.

Regardless of whether your day trading activities are reported on Schedule D or on Form 4797, you may need to pay tax on your gains by following the requirements for making estimated tax payments on Form 1040ES (PDF), Estimated Tax for Individuals.

References:

• Publication 535 (PDF), Business Expenses
• Publication 550 (PDF), Investment Income and Expenses
• Form 3115 (PDF), Application for Change in Accounting Method
• Form 4797 (PDF), Sales of Business Property
• Form 1040ES (PDF), Estimated Tax for Individuals
• Internal Revenue Code Section 475(f)
• Revenue Procedure 99-17

I purchased a computer last year to do online day trading part-time from home for additional income. Can I deduct or depreciate the cost of the computer or internet connection from my investment income?

You may deduct investment expenses (other than interest expenses) as miscellaneous itemized deductions on Form 1040, Schedule A (PDF), line 22, Itemized Deductions. This would include depreciation on the portion of your computer used for investment purposes, and the portion of your internet access charges used for investment purposes. These deductions must be reduced by 2% of your adjusted gross income. Use Form 4562 (PDF), Depreciation and Amortization, to compute the depreciation for the portion of your computer used for investment purposes. Unless the computer is used more than 50% for business purpose (as opposed to investment purposes), you cannot claim section 179 expensing of the computer or claim accelerated depreciation for it. For more information, refer to "Listed Property" in Publication 946 (PDF), How to Depreciate Property.

References:

• Form 1040, Schedule A (PDF), Itemized Deductions
• Form 4562 (PDF), Depreciation and Amortization
• Publication 946 (PDF), How to Depreciate Property

Can I deduct my investment expenses as business expenses?

The proper classification of your investment activities is important to determine how income and expenses are to be reported. Investors trade solely for their own account and do not carry on a trade or business. Their securities sales result in capital gain or loss and their deductible expenses are itemized deductions. Dealers sell securities to customers in the ordinary course of trade or business. Their sales result in ordinary gain or loss and their deductible expenses are trade or business expenses. Traders buy and sell securities frequently but have no customers. Their purchases and sales result in capital gain and loss, and their deductible expenses are trade or business expenses.

Even if you engage in extensive securities activities, you are an investor, not a dealer or trader, if you do not seek profit primarily in swings in daily market movements, and do not personally engage in or direct the purchases or sales. An investor trades for profit-motivated reasons such as long-term appreciation, dividends and interest. Whether the activities of an individual constitute trade or business or investment is determined from the facts in each case. These distinctions have been established through court cases.

If your trading activity is a business, your trading expenses would be reported on Form 1040, Schedule C (PDF), Profit or Loss from Business (Sole Proprietorship) instead of Form 1040, Schedule A (PDF), Itemized Deductions. Your gains or losses, however, would be reported on Form 1040, Schedule D (PDF), Capital Gains and Losses, unless you file an election to change your method of accounting.

If your trading activity is a business and you elect to change to the mark-to-market method of accounting, you would report both your gains or losses on Part II of Form 4797 (PDF), Sales of Business Property.

A change in your method of accounting requires the consent of the Commissioner and can not be revoked without the consent of the Secretary. Though there is no publication specific to day traders, the details for traders in securities and commodities are covered in Internal Revenue Code Section 475(f) and Revenue Procedure 99-17.

References:

• Publication 535 (PDF), Business Expenses
• Form 3115 (PDF), Application for Change in Accounting Method

I buy and sell stocks as a day trader using an online brokerage firm. Can I treat this as a business and report my gains and losses on Schedule C?

A business is generally an activity carried on for a livelihood or in good faith to make a profit. Rather than defined in the tax code, exactly what activities are considered business activities has long been the subject of court cases. The facts and circumstances of each case determine whether or not an activity is a trade or business. Basically, if your day trading activity goal is to profit from short-term swings in the market rather than from long-term capital appreciation of assets, if your income is primarily from the sale of securities rather than from dividends and interest paid on securities, and if you expect this income to be your primary income for meeting your personal living expenses, i.e. you do not have another regular job, then your trading activity might be a business.

For details about not-for-profit activities, refer to Publication 535 (PDF), Business Expenses. That chapter explains how to determine whether your activity is carried on to make a profit and how to figure the amount of loss you can deduct.

If your trading activity is a business, your trading expenses would be reported on Form 1040, Schedule C (PDF), Profit or Loss from Business (Sole Proprietorship), instead of Form 1040, Schedule A (PDF), Itemized Deductions. Your gains or losses, however, would be reported on Form 1040, Schedule D (PDF), Capital Gains and Losses, unless you file an election to change you method of accounting.

If your trading activity is a business and you elect to change to the mark-to-market method of accounting, you would report both your gains or losses and your trading expenses in Part II of Form 4797, Sale of Business Property. See Publication 550 (PDF), Investment Income and Expenses, for details.

A change in your method of accounting requires the consent of the Commissioner and can not be revoked without the consent of the Secretary. Though there is no publication specific to day traders, the details for traders in securities and commodities are covered in Internal Revenue Code Section 475(f) and Revenue Procedure 99-17.

References:

• Publication 535 (PDF), Business Expenses
• Publication 550 (PDF), Investment Income and Expenses
• Form 3115 (PDF), Application for Change in Accounting Method

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