Difference between trader and investor?

[plasma]

I don't know the difference. Is there a set of rules to determine which I am? Or do I just decide for myself?

[Ryan Gibson]

Trader Status is not a check the box election. You must meet a certain criteria. In some cases a a legal entity such as a corporation or LLC is the only way one can meet the status. Before setting up a legal entity or filing as a trader I recommend taking advantage of a free service we provide called a Tax Action Plan. More information and registration for this free service can be found here: http://www.tradersaccounting.com/taxplan.asp

The IRS rules on trader status on a case by case basis so the use of a legal entity may be a preferred method to avoid the unknown. Here is some information provided by the IRS:

"Special rules apply if you are a trader in securities, in the business of buying and selling securities for your own account. To be engaged in business as a trader in securities, you must meet all of the following conditions:

You must seek to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation.
Your activity must be substantial, and
You must carry on the activity with continuity and regularity.

The following facts and circumstances should be considered in determining if your activity is a securities trading business:

Typical holding periods for securities bought and sold.
The frequency and dollar amount of your trades during the year.
The extent to which you pursue the activity to produce income for a livelihood, and
The amount of time you devote to the activity.

If the nature of your trading activities does not qualify as a business, you are considered an investor, and not a trader. It does not matter whether you call yourself a trader or a "day trader." Further, a taxpayer may be a trader in some securities and hold other securities for investment. The special rules for traders do not apply to the securities held for investment. A trader must keep detailed records to distinguish the securities held for investment from the securities in the trading business. The securities held for investment must be identified as such in the trader's records on the day he or she acquires them."

Regards,
Ryan Gibson