¹Regs. Sec. 1.471-5 defines a dealer as "a merchant of securities...with an established place of business, regularly engaged in the purchase of securities and their resale to customers; that is, one who as a merchant buys securities and sells them to customers with a view to the gains and profits that may be derived therefrom." Because most individuals do not fall within this definition, this article does not analyze in any detail the dealer classification requirements.

²Eugene Higgins, 312 US 212 (1941).

³Robert P. Groetzinger, 480 US 23 (1987).

⁴Leonhard F. Fuld, 139 F2d 465 (2d Cir. 1943).

⁵Marlowe King, 89 TC 445 (1987).

⁶The court also found that a long position in gold was a part of the trading activity, because it was acquired during the course of the taxpayer's business. While the Service had conceded that the taxpayer's trading in commodities rose to the level of a trade or business, it argued that gold acquired through the exercise of gold futures and held for almost 18 months was not a part of the trading activity. The Service argued that under Higgins, note 2 supra, activities should be separated between investment and trading. The King court distinguished Higgins, noting that, in the present case, the gold was acquired in the course of (and was directly related to) the trading activity; in Higgins, there were two distinctly separate activities. Because in King, the gold was acquired in the regular course of the taxpayer's business, it was included as part of his trading activity.

⁷Humes H. Hart, TC Memo 1997-11.

⁸Chang H. Liang, 23 TC 1040 (1955).

⁹Joseph A. Moller, 721 F2d 810 (Fed. Cir. 1983), cert. den.

¹⁰Generally, the courts have not provided a precise definition of "long-term" for this purpose. For example, in Frederick R. Mayer, 32 Fed. Cl. 149 (1994), the Court of Federal Claims considered "more than thirty days" to be the benchmark in determining whether investments were long-term. In Est. of Louis Yaeger, 889 F2d 29 (2d Cir. 1989), the fact that no securities were held for less than three months indicated that the taxpayer was an investor. This judicial "we know it when we see it" approach leaves some uncertainty, but, in the absence of other persuasive factors demonstrating trader status, maintaining average holding periods of 30 days or less appears advisable for taxpayers who seek to qualify as traders.

¹¹Frederick R. Mayer, TC Memo 1994-209. This case involved the same taxpayer (but different tax years) as the case cited in note 10, supra. While the Tax Court considered securities held for less than 30 days as one factor, it also considered various other holding periods (e.g., one to three months and three to six months) in determining investor status. The 30-day test was not applied as a benchmark in the Tax Court opinion.

¹²See Secs. 1(h), 1211 and 1222.

¹³Secs. 1402(a)(2) and (3) provide that dividends and proceeds from the sale or exchange of assets are not subject to SE tax. Sec. 475(d)(3)(A)(i) provides that gains and losses are treated as ordinary income. However, Sec. 475(f)(1)(D) provides that Sec. 475(d)(3)(A)(i) does not apply for purposes of Sec. 1402 computations. Thus, even if a Sec. 475(f) election is in effect, the earnings from the trading activity will not be subject to SE tax.

¹⁴See Sec. 179(b)(3). "Listed" assets must be used more than 50% for business purposes to qualify; see Sec. 280F(d)(1) and (b).

¹⁵See Secs. 1211 and 1212.

¹⁶Presumably, the basis and gain or loss could instead be listed on Line 36 and included in the "cost of goods sold" computation. Typically, this would require the calculation of beginning and ending inventory, which seems to be an unnecessary level of detail for a trader who has not made a Sec. 475(f) election. For a taxpayer with a Sec. 475(f) election, completion of Line 36 and the beginning and ending inventory lines of Part III (the cost of goods sold section) seems more appropriate, because the taxpayer must track inventory for purposes of computing the mark-to-market adjustment.

¹⁷Otherwise, Schedule C would report only trading expenses, while Schedule D would report trading proceeds, thus providing a distorted picture of the trader's profitability on Schedule C.

¹⁸Sec. 475(f)(1)(D) provides that rules similar to those in Sec. 475(d) apply to securities held by a person in a trade or business for which a Sec. 475(f) election is in effect. Sec. 475(d)(1) provides that Sec. 1091 does not apply to losses realized under Sec. 475(a). Thus, Sec. 1091 presumably does not apply to an activity for which a Sec. 475(f) election is in effect.

¹⁹Rev. Proc. 99-17, IRB 1999-7, 52.

²⁰See Prop. Regs. Sec. 1.475(f)-2(a)(4), which provides that Sec. 475(d) applies to any such investment. Sec. 475(d)(2) provides that such an investment will be marked to market under Sec. 475(a) unless this would result in a loss, in which case the loss will be recognized only to the extent that gain was previously recognized under that section on such investment. Thus, failing to properly identify investments could lead to a terrible tax result—gain being picked up as ordinary income, but losses being disallowed until the securities are disposed of in a later year.

²¹Otherwise, the long-term holding and relatively infrequent trading of the investment assets might be construed as demonstrating that the taxpayer's entire portfolio is an investing activity (and not a trading activity) for tax reporting purposes.

²²As discussed below, a Sec. 475(f) election allows a trader to deduct losses from the sale of securities as ordinary losses not subject to the Sec. 1211(b) limit.