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Author: DowDanny Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121316  
Subject: Re: ST Gain Loophole??? Date: 1/31/2000 10:46 PM
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fooltag,

Careful, because I am speaking strictly as an uninformed amateur - I could be way wrong.

But what you see as an advantage, I see as a distinct disadvantage.

People choose to be classified as "professional trader" because it allows them to deduct certain expenses and tools-of-the-trade as 'business expenses', plus *I think* it allows them to vastly simplify their Sch D reporting of transactions.

But it doesn't allow them to simply "not pay taxes on ST gains". Note, even you said:
> This classification allows them to avoid short term capital gains taxes because they are not seen as capitalgains, but rather as income. <

Income, means "pay taxes as if it were ordinary wages" - not a very tax advantaged situation. Indeed, *I think* the net earnings of a professional trader are subject to self-employment taxes (aka FICA) so might be doubly disadvantaged compared to capital gains and other "unearned income" which are excluded from Social Security taxes.

In any case, the IRS seems to be quite picky about who they "allow" to be classified as professional trader. The key test(s) seems to be the holding period for individual positions AND the frequency of trading. Even if you are trading 20x a month, if your average stock is held for weeks or months, it is likely you will not classify as a trader.

There are many web sites which purport to describe the advantages and requirements to be a pro-trader. Use your favorite search engine or wait a few moments for someone else to reply to your message here with a better URL.

Cheers,

- Danny
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