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<<I am quite active in the stock market beside a full time job. I trade about 4/5 times a month and have a portfolio of over $250,000. This is, of course, a 'for profit' activity for tax purposes. As a part of this activity I incur quite a bit of expenses - for subscriptions to several market investment newsletters, an on-line service for technical analysis, AOL for business information and portfolio updates, use of a computer, telephone line etc. My question is whether, and how, I can report this activi
ty as a business for tax purposes. Do I need to incorporate, or create a business entity of some sort, or continue filing as an individual and use Sched. C for reporting this business? I would greatly appreciate your opinion. Thanks.>>

Different professional have different views on this issue. I don't believe that your trading activity will qualify you for a "business" status (via Schedule C) on your personal tax return, and the expenses that you describe would normally be "investment" expenses, deductible on Schedule A as a Miscellaneous Itemized Deduction, subject to the 2% AGI limitation. Additionally, if you were to be a "business" with your stock trading, I believe that you would lose the captial gain character of your trades (they would ALL be ordinary income), AND you would be subject to self employment tax on your profit (at 15% of net income).

You can read more about my views on this issue by looking at the Taxes Frequently Asked Questions area (get there in the Fools School via the main screen/home page) and read my post entitled "Trader or Investor".

If you would like another view on this issue, I would urge you to read "The Trader's Tax Survival Guide" by Mr. Ted Tesser, published by John Wiley & Sons. Mr. Tesser will give you an entirely different view of things. And you'll have to be the judge as to which course of action you may want to take.

TMF Taxes
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