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Tax News
Yet Another “Trader” Argument Doomed at the Tax Court Level
February 26, 2014
Cases
As I’ve been following and discussing here on this blog, in the last few years the Tax Court has been on a roll. Everything that comes through its doors related to trader status and claiming ordinary losses from trading activities appears to be doomed from the get go if the taxpayer is an individual and does not carry on trades every single day of the year. God forbid the trader has another occupation from which it derives the majority of its income. That makes the Tax Court’s test for trader status almost impossible to meet for any non-trader professional that may be trading as a second job. It seems that the Tax Court does not endorse the view that a person can have two businesses or two occupations, if one of those occupations is trading.  So much found the taxpayer in the mint-of-the press decision of Assaderaghi v Comm’r, T.C. Memo. 2014-33. As with many other decisions in this domain the taxpayer traded at a large scale (in this case over 500 trades a year) and claimed ordinary losses instead of capital losses which typically can offset only $3,000 of ordinary income. However, the taxpayer was found wanting.

What didn’t the Tax Court like? First, the Court reasoned that 535 trades and $2.6M in gross proceeds were not substantial activity. Second, executing trades on 154 days during the year was not frequent enough (presumably due to some extent to the fact that half of the trades were during three months). Third, the record did not sufficiently establish that Mr. Assaderaghi held the trades for sufficiently short periods of time (i.e. under 30 days).

What did the taxpayer actually do? He traded on margin and his trades included security sales, call and put options, and short sales. To execute his trades he used a software program called Fidelity Active Trader Pro.  He installed and used Active Trader Pro on both his work and home computers.  Mr. Assaderaghi generally monitored and traded between 20 and 30 different stocks and options. To analyze market trends he researched 9-day and 26-day market indicators and used technical tools such as stock option pricing, moving average convergence divergence, and exponential moving averages and looked for oversold and overbought conditions.  Off of the 535 trades, 40% were round-trip day trades. The taxpayer however had a full-time job.  He spent most of his time at the office where he worked as a vice president of engineering.  While Assaderaghi’s job as an engineer did not make or break the case, the Tax Court went on to expressly reason in Fn 18 that his employment and substantial income unrelated to his securities activity also supports a finding that he was not a trader.

There is a theme coming out of these cases. If you are not trading in heavy volume and large dollar amounts and if trading is not your primary activity, get ready for an uphill battle in the Tax Court. Until Treasury comes with some modernization of the mark-to-market rules whereby a taxpayer could elect MTM upfront even if he does not meet the trader status, or Treasury comes up with some safe-harbor, or objective test, then taxpayers will be left with dealing with the Tax Court’s insurmountably high "trader" threshold.
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Tags: mark to market, ordinary losses, section 474(f), trader v. investor