In order to deduct your investment-related expenses as business expenses, you must be engaged in a trade or business. The Supreme Court held many years ago that an individual investor isn’t engaged in a trade or business merely because he manages his own securities investments, regardless of the amount of the investments or the extent of the work required. If a taxpayer can show that his investment activities rise to the level of carrying on a trade or business, however, he may be considered a trader, who is engaged in a trade or business, rather than an investor, who isn’t. A trader is entitled to deduct his investment-related expenses as business expenses. A trader is also entitled to deduct home office expenses if the home office is used exclusively on a regular basis as his principal place of business. An investor, on the other hand, isn’t entitled to home office deductions, since his investment activities aren’t a trade or business.

Since the Supreme Court’s decision, there has been extensive litigation on the issue of whether a taxpayer is a trader or investor. The Tax Court has recently developed a two-part test that must be satisfied in order for a taxpayer to be a trader. Under this two-part test, a taxpayer’s investment activities are considered a trade or business only where both of the following are true:

 (1) the taxpayer’s trading is substantial (i.e., sporadic trading won’t be a trade or business), and

 (2) the taxpayer seeks to catch the swings in the daily market movements, and to profit from these short-term changes, rather than to profit from long-term holding of investments.

Thus, the fact that a taxpayer’s investment activities are regular, extensive, and continuous isn’t in itself sufficient for determining that a taxpayer is a trader. In order to be considered a trader, a taxpayer must show that he buys and sell securities with reasonable frequency in an effort to profit on a short-term basis. Even a taxpayer who made over 1,000 trades a year with trading activities averaging about $16 million annually was held to be an investor because the holding periods for stocks sold averaged about one year.