8 January 2024

Tax Planning: Investors Vs. Traders



ORBA logo
ORBA is a full-service accounting, tax and business consulting firm in downtown Chicago serving the needs of privately-held companies, individuals and not-for-profit organizations. ORBA’s Certified Public Accountants have experience with accounting and assurance, business advisory services, financial and estate planning, fraud investigation, tax, litigation, and mergers and acquisitions.
An investor in securities trades only for their own account and they do not carry on a trade or business related to those securities.
United States Tax
To print this article, all you need is to be registered or login on

An investor in securities trades only for their own account and they do not carry on a trade or business related to those securities.

A trader in securities engages in many transactions on a regular basis. The distinction between a trader and an investor is the frequency and size of the risks they take on short-term market swings. Investors more often hold their securities for long periods of time while traders hold securities for short periods.

Qualifying as a trader may offer significant tax advantages. However, it is difficult to meet the definition. Just calling yourself a "trader" or "day trader" is not enough. Here is what you need to know to help determine if you qualify.


Traders are subject to more favorable tax rules when it comes to deducting investment expenses and the treatment of gains and losses. The Tax Cuts and Jobs Act eliminated most investment expense deductions for investors from 2018 through 2025. Traders, on the other hand, can fully deduct their expenses as ordinary business expenses.

Investors can deduct only up to $3,000 in net capital losses from their ordinary income, such as wages and interest (with any excess carried forward to future tax years). But again, traders have more latitude. After making a valid mark-to-market election, a trader is not subject to the $3,000 limit. Note that in exchange for these benefits, all of a trader's securities gains and losses — including unrealized gains and losses as of the last day of the tax year — are treated as ordinary income or loss.


Generally speaking, investors buy and sell securities and hold them for a longer term with the expectation that they will earn income from dividends, interest or capital appreciation. In contrast, traders typically seek to earn quick profits based on short-term market fluctuations. To show that they are conducting a trade or business, traders must participate in sufficiently substantial, continuous and regular trading activities.

Unfortunately, there is no bright line test for distinguishing between traders and investors, such as a minimum number of hours, days or trades per year. The IRS and the courts look at factors such as:

  • The amount of time you devote to buying and selling securities;
  • Typical holding periods;
  • The frequency and dollar amount of trades; and
  • The extent to which you rely on these activities for a livelihood.

By default, the IRS considers individuals who buy and sell securities investors. The burden of proof is on the taxpayer to establish themselves as a trader.


If you devote a substantial amount of your time to buying and selling securities, talk to your advisors about whether you qualify as a trader. If you think you do, weigh the tax benefits of filing as a trader against any potential drawbacks.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

See More Popular Content From

Mondaq uses cookies on this website. By using our website you agree to our use of cookies as set out in our Privacy Policy.

Learn More