EDUCATION CENTER
GTT RESOURCES: TRADER TYPES: MONEY LOSING TRADERS
Traders who lose money every year may be challenged by the IRS under the "not-for-profit activity” loss rules (otherwise known as the "hobby-loss" rules).
See our Robert A. Green, CPA's article on the "hobby-loss rules" in Active Trader July 2002: "Trading is NO HOBBY: While you don't consider your trading activity to be merely a recreational hobby, watch out! – The IRS might. If you have consistently lost money as a trader, an uninformed IRS agent may try to classify your business as a ‘hobby’ and prevent you from taking your full tax benefits."
Recently, the IRS has started to examine more traders, as well as other types of taxpayers. The IRS has a new blessing from Congress to get tough on tax cheats, and Congress needs new revenue to balance budget deficits.
Based on our experience with the IRS examining tax exams, we have noticed a new, disturbing trend from the IRS: It is challenging "part-time traders" and "money-losing traders." Click here to read about "part-time traders."
If you are a money-losing trader, it is imperative that you read our updated guides:
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In this updated guide we cover the following on money losing traders: the not-for-profit activities loss rules; how to overcome them if you are a money-losing trader; how to meet the "relevant factors" and "profit-making intent" tests; how to deal with the IRS in an exam and much more.
For example:
Let's say that in 2003, you had a fulltime job in California, working
9 to 5, Monday through Friday. You traded almost every morning before
going to work, and you managed your trading business at nights and on
weekends. You elected mark-to-market accounting
for 2003 by April 15, 2003, assuming you would qualify for trader
tax status in 2003.
You incurred significant trading losses in 2003. You filed your 2003 tax returns assuming you qualified for trader tax status – i.e., you thought you were entitled to report your trading business expenses on Schedule C (Profit or Loss from Business) and your trading losses on Form 4797 (Sale of Business Property – Part II Ordinary Gain or Loss). Your ordinary business losses (Schedule C and Form 4797) contributed to a large net operating loss (NOL). You carried back your NOL on a Form 1045 tax return and expected a large refund.
Instead of receiving a NOL refund, however, you receive a tax notice from the IRS asking questions about your trader tax status. The IRS reviews your Form 1045 NOL refund claim tax return closely (as is the general rule, since the IRS is sour grapes about paying a large NOL refund check). The IRS sees you have a job, or another business, and they figure that since you lost money in trading, you obviously had to have paid your bills from monies earned in your job or other activity (or from savings). The IRS then makes an unreasonable leap in logic, based on the part-time trader and/or hobby-loss rules: Your trading activity is not a business. The IRS puts the pressure on you to prove to them that you are entitled to use business tax treatment for your trading business. You must prove either that you qualify as a trader and/or the hobby loss rules don't apply. It is likely that only the very best trader tax experts can help you at this point. Before you let it get that far, we suggest you read our above guide and consult with us.
Good news! Check out our new "Advocacy campaign" to seek relief for "money-losing traders." We need your help to enact this change. Click here.
If you have any questions, e-mail info@greencompany.com or call us.
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