The proper classification is important to determine how investment income and investment expenses are to be reported on your IRS tax return. Investors trade solely for their own account and do not carry on a trade or business. Their securities sales result in capital gain or capital loss and their tax deductible investment expenses are itemized tax deductions on their IRS tax return. Dealers sell securities to customers in the ordinary course of trade or business. Their sales result in ordinary gain or ordinary loss and their tax deductible investment 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 capital loss, and their tax deductible investment expenses are trade or business expenses. The following investment expenses are tax deductible as miscellaneous itemized tax deductions on IRS tax form 1040, Schedule A by investors. 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. An investor trades for profit motivated reasons such as long term appreciation, dividends and interest. Whether the activities of an individual constitute trade or business or investment is determined from the facts in each case.