Trader Law and Legal Definition

For purposes of U.S. income tax, there is a distinction to be made between an "investor" and a "trader" in securities. Most individuals, who may make trades in securities a few times a week, are classified as investors. A trader, on the other hand, is considered to be carrying on business. The main tax advantage to the trader classification is the ability to deduct most expenses incurred in the course of trading, such as software, computer equipment, subscriptions, etc. The border line between an investor and a trader for tax purposes is not always clear. The Internal Revenue Code does not itself define the term trader so reference must be made to the IRS guidelines and court cases that deal with traders.

In its year 2003 instructions for Form 1040, Schedule D, the IRS states as follows:

"To be engaged in business as a trader in securities:

  • 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 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."