Wednesday, June 2, 2004

One of the perennially interesting areas in the basic tax course is the sometimes inane distinction between stock traders and stock investors. Taxpayers and the IRS, of course, argue different sides of the coin, depending on whether there is a gain (investor status results in a lower capital gains tax rate) or a loss (investor status restircts deductibility to $3,000/year in excess of capital gains). The Tax Court yesterday weighed in with Chen v. Commissioner, T.C. Memo. 2004-133, holding that Mr. Chen’s trading activity was not “regular, frequent and continuous,” even though he made 323 stock trades (278 in a 2-month period) in the tax year in question. Mr. Chen thus could deduct only $3,000 of his $85,000 loss in the year before the court. Of course, as Roth & Company note, he will be able to fully deduct the loss by 2027!