Question

What are three advantages of being considered a trader as opposed to an investor for federal income tax purposes

Answer 1

The three advantages of being considered a trader as opposed to an investor for federal income tax purposes are:

(1): Ability to deduct ordinary and necessary expenses incurred towards trading activity – Traders, for federal income tax purposes, can deduct ordinary and necessary expenses of their trading activity. This as per the provisions of section 162(a) and is applicable during the computation of AGI (adjusted gross income). No such provisions are available for investors.

(2): Ability to deduct interest expenses in case of debt proceeds – The second advantage for traders is that they can deduct interest expenses in those cases where debt proceeds are used to either buy investments or carry investments. This will reduce the AMTI (alternative minimum taxable income) for traders. No such provisions are available for investors.

(3): Traders, unlike investors, are not subjected to limited category of nonbusiness expenses for deduction purposes – Investors can deduct only the more limited category of nonbusiness expenses for the production of income under Sec. 212. Traders are free from such limitations and also can escape the $3,000 capital loss limitation of Sec 1211(b).