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<<It would seem the only benefit would be the deduction of some expenses...which for most, would not come close to the cost of the additional taxes. Wouldn't an investor, paying only capital gain (even at the short term rate) tax be the b
etter arrangement? It would seem that a full time
'investor' who is living entirely off his gains, with no W2 income has 'beat the system'. Any thoughts?

Well, first off, remember that "traders" generally receive only short term gains by definition. They usually hold their positions for a few days (or hours) before they sell. So they generally never see long term gain treatment on their gains.

Additionally, many of these 'traders" want to be able to claim their expenses (such as publications, computers and computer programs, etc.) as a Schedule C expenses (which is fully deductible against other income...within some limits) rather than taking these deductions as "miscellaneous itemized deductions" which are subject to the 2% AGI floor, and are only valuable if you can itemize deductions.

So if a "trader" can generate a Sch C loss, but treat the gains as short term capital gains, they avoid the SE tax and generate a Sch C loss. Could be the best of all worlds.

Just because I don't think that this would hold up under IRS review doesn't mean that other professionals have different opinions.

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