Many friends are trading daily in the stock market. Some of them might want to make it a business instead of just going by the regular capital gain tax rule.
How to qualify as a trader in IRS tax code topic 429
First, generally, the trader needs to
- seek to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation;
- carry trading activity substantially, and with continuity and regularity.
Second, form a company to show your commitment to above business missing
Third, make sure you make the mark-to-market election by the original due date (not including extensions) of the tax return for the year prior to the year for which the election becomes effective.
Once you do the above 3 things, you could almost less likely to be challenge by IRS if you get audited for claiming to be a day trader.
The downside of the being a day-trader is not to be able to claim the tax benefits of the long-term capital gain and qualified dividend.
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