Look into A Trader's Choice of Entities. To further guide us there are a number of Tax Court decisions which decided whether a taxpayer's transactions in securities constituted a bona-fide trade or business. Among the most important court decisions were those regarding whether a full-time professional gambler's wagering activity constituted a trade or business for income tax purposes. This landmark decision confirmed the availability of trader status for income tax purposes. Their securities sales result in capital gain or loss and their deductible expenses are itemized deductions.
Dealers sell securities to customers in the ordinary course of trade or business.
Their sales result in ordinary gain or loss and their deductible expenses are trade or business expenses. Traders buy and sell securities frequently but have no customers. Their purchases and sales result in capital gain and loss, and their deductible expenses are trade or business expenses. Even if you engage in extensive securities activities, you are an investor, not a dealer or trader, if you do not seek profit primarily in swings in daily market movements, and do not personally engage in or direct the purchases or sales. Whether the activities of an individual constitute trade or business or investment is determined from the facts in each case.