In the

United States Court of Appeals

For the Seventh Circuit

No. 00-1747

Gary K. Bielfeldt and Carlotta J. Bielfeldt,

Petitioners-Appellants,

v.

Commissioner of Internal Revenue,

Respondent-Appellee.

Petition to Review Decision

of the United States Tax Court.

No. 5936-96--David Laro, Judge.

Argued September 27, 2000--Decided November 8,

2000

 Before Posner, Coffey, and Kanne, Circuit

Judges.

 Posner, Circuit Judge. Gary Bielfeldt

(and his wife, but she is a party only by

virtue of having filed a joint return

with her husband), a large trader in U.S.

Treasury notes and bonds, seeks to

overturn a decision by the Tax Court

denying him the right to offset immense

trading losses that he incurred in the

1980s against all but $3,000 a year in

ordinary income. He claims to be not a

trader but a dealer and that the losses

he incurred in the sale of the Treasury

securities were losses connected with his

dealer’s "stock in trade"; such losses,

even when they result as his did from the

sale of a capital asset, are treated as

ordinary rather than capital losses and

can therefore be fully offset against

ordinary income. 26 U.S.C. sec. 1221(1).

In contrast, capital losses, while they

can be fully offset against capital

gains, can be offset against ordinary

income only up to $3,000 a year. 26

U.S.C. sec. 1211(b); Marrin v. IRS, 147

F.3d 147, 150-52 (2d Cir. 1998). Although

the amount is arbitrary, the rationale

for limiting such offsets is not; it is

to reduce taxpayers’ incentives to so
structure their capital transactions as

to realize losses today and defer gains

to the future. See Robert H. Scarborough,

"Risk, Diversification, and the Design of

Loss Limitations Under a RealizationBased Income Tax," 48 Tax L. Rev. 677,

680-81 (1993); Alvin C. Warren, Jr., "The

Deductibility by Individuals of Capital

Losses Under the Federal Income Tax," 40

U. Chi. L. Rev. 291, 310-14 (1973). If

Bielfeldt’s characterization of his

status is sound, he is entitled to some

$85 million in refunds of his federal

income tax.

 The standard distinction between a

dealer and a trader is that the dealer’s

income is based on the service he

provides in the chain of distribution of

the goods he buys and resells, rather

than on fluctuations in the market value

of those goods, while the trader’s income

is based not on any service he provides

but rather on, precisely, fluctuations in

the market value of the securities or

other assets that he transacts in. Marrin

v. IRS, supra, 147 F.3d at 151; United

States v. Wood, 943 F.2d 1048, 1051-52

(9th Cir. 1991); United States v.

Diamond, 788 F.2d 1025, 1029 (4th Cir.

1986). This is not to deny that a trader,

whether he is a speculator, a hedger, or

an arbitrageur, serves the financial

system by tending through his activities

to bring prices closer to underlying

values, by supplying liquidity, and by

satisfying different preferences with

regard to risk; he is not a parasite, as

the communists believed. But he is not

paid for these services. His income from

trading depends on changes in the market

value of his securities between the time

he acquired them and the time he sells

them.

 Although one thinks of a dealer’s

inventory or stock in trade as made up of

physical assets, it can be made up of

securities instead. A stockbroker who

owned shares that he sold to his

customers at market price plus a

commission would be a bona fide dealer.

The example of a recognized "dealer" in

securities that is closest to Bielfeldt’s

self-description because it blurs the

distinction between deriving income from

providing a service in the purchase or

sale of an asset and deriving income from

changes in the market value of an asset

is a floor specialist on one of the stock
exchanges. The specialist maintains an

inventory in a specified stock in order

to maintain liquidity. If its price

soars, indicating that demand is

outrunning supply, he sells from his

inventory to meet the additional demand,

and if the price of the stock plunges, he

buys in the open market in order to

provide a market for the people who are

trying to sell. See Bradford v. United

States, 444 F.2d 1133, 1135 (Ct. Claims

1971) (per curiam); Louis Loss,

Fundamentals of Securities Regulation

671, 792-93 (1983); Zvi Bodie, Alex Kane

& Alan J. Marcus, Investments 89-91 (3d

ed. 1996). He is not paid by the stock

market for this service, but is

compensated by the income he makes from

his purchase and sales and by commissions

on limit orders (orders contingent on a

stock’s price hitting a specified level)

placed with him by brokers. United States

v. Bleznak, 153 F.3d 16, 18 (2d Cir.

1998); Fridrich v. Bradford, 542 F.2d

307, 309 n. 5 (6th Cir. 1976); Loss,

supra, at 671; Bodie, Kane & Marcus,

supra, at 90. The Internal Revenue

Service treats his gains and losses as

ordinary income because the Internal

Revenue Code classifies him as a dealer.

See 26 U.S.C. sec.sec. 1236(a), (d).

 Treasury securities, at least the ones

in which Bielfeldt transacted, are not

sold on an organized exchange, and so

there are no floor specialists--there is

no floor. The market for Treasury

securities is an over-the-counter market,

like the NASDAQ. But the economic

function that the specialists on the

organized exchanges perform is

independent of the form of the market,

and dealers who specialize in Treasury

securities (called "primary dealers," and

discussed in the next paragraph) are

close analogues of the floor specialists,

just as NASD market makers are. There is

even a new law that requires the primary

dealers in Treasury securities, with some

exceptions, to register with the SEC or

the NASD. Government Securities Act of

1986, Pub. L. 99-571, sec.sec. 102(e) and

(f), 100 Stat. 3218, 15 U.S.C. sec. 78o5.

 Bielfeldt claims that he performs this

function too, though he is not a

registered or primary dealer. The

securities in question are used to

finance the national debt. During the
period in which he incurred losses, there

was no talk of paying off the debt--on

the contrary, the debt was growing. To

finance growth and redemptions, the

Treasury would periodically auction large

quantities of bonds and notes, which

would be underwritten by a relative

handful of primary dealers. Bielfeldt

would buy in huge quantities from these

dealers and resell in smaller batches,

often to the same dealers, a few weeks

later. His theory, which worked well for

a few years and then turned sour, was

that the Treasury auctions were so large

that each one would create a temporary

glut of Treasury securities, driving

price down. He would buy at the depressed

price and hold the securities off the

market until, the glut having disappeared

(because he was hoarding the securities),

price rose, and then he would sell. He

argues that had it not been for this

service that he performed in the

marketing of Treasury securities, the

price the Treasury got at its auctions

would have been depressed, with the

result that interest on the national debt

would be even higher than it is.

 What he is describing is simply the

social benefit of speculation. Think back

to the Biblical story of Joseph. During

the seven fat years, years of glut,

Joseph "hoarded" foodstuffs so that there

would be an adequate supply in the seven

lean years that he correctly predicted

would follow. In a money economy, he

would have financed the program by buying

cheap, which would be easy to do in a

period of glut, and selling dear, which

would be easy to do in a period of

scarcity and would help to ration

supplies in that period. He would buy

cheap yet pay higher prices than people

who were buying for consumption, since he

would anticipate a profit from the later

sale during the period of scarcity.

Similarly, Bielfeldt hoarded Treasury

securities during the fat weeks

immediately after an auction so that

there would be an adequate supply in the

lean weeks (the weeks between auctions)

that followed. That activity may have

been socially beneficial, as he argues,

but it is no different from the social

benefits of speculation generally. His

argument if accepted would turn every

speculator into a dealer for purposes of

the Internal Revenue Code. United States

v. Diamond, 788 F.2d 1025, 1030 (4th Cir.
1986).

 Unlike a floor specialist, Bielfeldt

undertook no obligation to maintain an

orderly market in Treasury securities. He

did not maintain an inventory of

securities; and because he skipped

auctions that didn’t seem likely to

produce the glut that was the basis of

his speculative profits, there were

months on end in which he could not have

provided liquidity by selling from

inventory because he had no Treasury

securities. In some of the tax years in

question he participated in as a few as 6

percent of the auctions, and never did he

participate in more than 15 percent. As a

result, he was out of the market for as

much as 200 days a year. He was a

speculator, period. As the Federal

Reserve Bank of New York, which kept

track of Bielfeldt’s trading in Treasury

securities and sent updates to the IRS,

put it, "his activities are in most cases

outright speculation of interest rate

movements."

 In saying that Bielfeldt was not a

specialist, we don’t mean to imply that

the Internal Revenue Service would be

required to recognize as a dealer a

trader who structured his operation to

resemble that of a floor specialist but

was not a floor specialist as defined in

26 U.S.C. sec. 1236(d)(2). That issue is

not before us. Nor is the bearing of a

1997 statute, 26 U.S.C. sec. 475(f),

which allows a securities trader to treat

paper gains and losses as ordinary rather

than capital income by marking to market

the securities he owns at the end of the

tax year, that is, by pretending they had

been sold then. We note finally that

Bielfeldt’s alternative argument, that

Treasury securities are "notes receivable

acquired in the ordinary course of trade

or business" and therefore are not

capital assets within the meaning of 26

U.S.C. sec. 1221(4), is frivolous. It

implies that no bonds, government or

private, are capital assets, since a

bond, like a note receivable, is a

promise to pay the holder of the

instrument.

Affirmed.