Internal Revenue Service - Essay Example

 «Internal Revenue Service»Investors can generally deduct the expenses of producing taxable investment income. These include expenses for investment counseling and advice, legal and accounting fees, and investment newsletters. These expenses are deductible on Form 1040, Schedule A (PDF), Itemized Deductions, as miscellaneous deductions to the extent that they exceed 2% of adjusted gross income. Interest paid on money to buy or carry investment property that produces taxable income is also deductible on Schedule A, but under section 163(d) the deduction cannot exceed the net investment income.

Commissions and other costs of acquiring or disposing of securities are not deductible but must be used to figure gain or loss upon disposition of the securities. An investor is not subject to self-employment tax (Internal Revenue Service, n.d. b). Special rules apply for traders in securities who are in the business of buying and selling securities for their own account tax (Internal Revenue Service, n.d. b). According to the Internal Revenue Service (n.d. b), to be engaged in business as a trader in securities, all of the following conditions must be met: Objective of profiting from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation.

Activity must be substantial, and Continuity and regularity of trading activity.Furthermore, according to the Internal Revenue Service (n.d. b), the following facts and circumstances should be considered in determining if the activity is a securities trading business: Typical holding periods for securities bought and sold. The frequency and dollar amount of trades during the year. The extent to which the activity contributes to the generation of income for a livelihood, and The amount of time devoted to the activity.

Further, a taxpayer may be a trader in some securities and hold other securities for investment. The special rules for traders do not apply to the securities held for investment. A trader must keep detailed records to distinguish the securities held for investment from the securities in the trading business. The securities held for investment must be identified as such in the trader's records on the day he or she acquires them (Internal Revenue Service, n.d. b). The limit on investment interest expense, which applies to investors, does not apply to interest paid or incurred in a trading business.

Commissions and other costs of acquiring or disposing of securities are not deductible but must be used to figure gain or loss upon disposition of the securities. Gains and losses from selling securities as part of a trading business are not subject to self–employment tax (Internal Revenue Service, n.d. b). The tax treatment of sales of securities held in connection with a trading business depends on whether a trader has previously made an election under section 475(f) to use the mark-to-market method of accounting.

If the mark-to-market election was not made, then the gains and losses from sales of securities are treated as capital gains and losses that must be reported. Both the limitations on capital losses and the wash sale rules continue to apply. However, if the mark-to-market election was timely made, then the gains and losses from sales of securities are treated as ordinary gains and losses. Further, neither the limitations on capital losses nor the wash sale rules apply to traders using the mark-to-market method of accounting (Internal Revenue Service, n.d. b).

ReferencesInternal Revenue Service (n.d. a). Publication 550 – Introductory Material. Retrieved September 2, 2006, from http://www.irs.gov/publications/p550/ar01.html#d0e34Internal Revenue Service (n.d. b). Topic 429 – Traders in Securities (Information for Form 1040 Filers). Retrieved September 2, 2006, from http://www.irs.gov/taxtopics/tc429.html