The IRS has required that certain facts and circumstances should be considered in determining whether or not a taxpayers activity is to be considered a securities trading business. These facts and circumstances are as follows;
1. Typical holding periods for securities bought and sold by the taxpayer (engaged in a securities trading activity).
2. The frequency and dollar amount of the taxpayer's trades during the year.
3. The extent to which a taxpayer pursues the activity to produce income for a livelihood.
4. The amount of time the taxpayer devotes to the activity.
If the taxpayers trading activities does not qualify as a securities business, the taxpayer is considered an investor, and not a trader. It is irrelevent whether the taxpayer calls themselves 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.
The IRS requires that the trader must keep detailed records to distinguish the securities held for investment from the securities in the trading business. Furthermore, the IRS has stated that the securities held for investment must be identified as such in the trader's records on the day the taxpayer acquires them. How can a taxpayer make a Mark to Market Election? What is the tax treatment of sales of securities in connection to trading business?