On the other hand, an investor may maintain an office and incur substantial expenses for advice, information, on-line services, record keeping, etc. for the purposes of managing his large and active portfolio. While an investor's active management of the portfolio may result in his obtaining most of his income from the investments, this has no effect on his Investor Status. It is the character of the financial securities which he buys and the amount of selling activity that he engages in with respect to them that determines his tax status. Despite the significant amount of time and effort devoted to this and the large amount of funds invested in the transactions, the Tax Court held that he was not a trader but was actually an investor. 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.