Taxation for Investor and Traders

For tax purposes the tax treatment for a trader in securities or commodities depends on their tax classification.

A trader is engaged in the business of buying and selling securities for one's own account. To be classified as a trader the trader must seek to profit from daily market fluctuations in the prices of securities or commodities and not from dividends, interest or capital appreciation. Factors that are considered for this include the typical holding periods for securities bought and sold, the frequency and dollar amount of trades during the year, the extent to which a taxpayer pursues the trading activity to produce income from a livelihood, and the amount of time devoted to the activity. A trader who chooses to elect mark to market accounting methods reports both gain and losses as ordinary income instead of capital gain and losses on form 4797.

An investor typically seeks to profit from investment earnings and capital appreciation.

A dealer in securities in the business of resale to customers and typically profit from the business transaction and not from appreciation in the security.

Dealers report transaction on a Schedule C, Investors report transaction on Schedule D, and Traders on schedule D, unless they market to market which they then report on Part II form 4797.