The proper classification is important to determine how income and expenses are to be reported. Investors trade solely for their own account and do not carry on a trade or business. 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. These distinctions have been established through court cases. A change in your method of accounting requires the consent of the Commissioner and can not be revoked without the consent of the Secretary.