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Could the IRS really be a team of Apes engaged in an onset of war for supremacy with human taxpayers? In the new blockbuster film “Rise of the Planet of the Apes”, genetic engineering leads to the development of intelligence in apes and the onset of a war between Apes and Humans. In the real world, day traders and investors attempt to conquer the IRS by meeting “Trader Status” and reap all valuable tax benefits, including the privilege to make the Mark-to-Market accounting election. But does this make the IRS the “Damn Dirty Ape’s” of the real world? Do we, as traders, put ourselves at risk? Shockingly, the true primate in my tasteless parody is not the IRS or the taxpayer, but the so-called tax professionals who lack the proper knowledge and training in trader taxation.

The consequences of bad trader tax advice can cost a small fortune, as illustrated in Richard Kay’s recent tax court battle for “Trader Status”. In 1999, Mr. Kay filed a mark-to-market election with the IRS. During 2000 through 2002, he claimed ordinary trading losses that totaled $2,730,674.00.
Mr. Kay’s ordinary losses sound substantial and suspicious, however, filing as a trader and correctly filing for Mark to Market, does overcome the $3000 a year loss limitation by changing the “capital loss” into “ordinary losses”. Would your tax advisor agree that these are legitimate losses? With no background information to substantiate Mr. Kay’s claim as a trader it’s time to tell your tax professional, “Get your stinking paws off my tax return you damn dirty ape”!

For Mr. Kay to be considered a “Trader in Securities” or reach “Trader Status” and make the Mark-to-Market election he had to meet all of the following conditions:

1) Must seek to profit from daily market movements in the prices of securities and not from dividends, interest or capital appreciation.
2) Trading activity must be substantial.
3) Must carry on the activity with continuity and regularity.

The following facts and circumstances would also need to be considered in determining if the activity is a securities trading business:

4) Typical holding period for securities bought and sold.
5) The frequency and dollar amount of the trades during the year.
6) The extent to which you pursue the activity to produce income for a livelihood.
7) The amount of time devoted to the activity.

If Mr. Kay’s trading activities do not meet the above definition of a business, he will be considered an investor, not a trader and will not be entitled to Mark to Market nor entitled to taking the ordinary losses that he claimed.

What did Mr. Kay’s tax advisor fail to consider? In 2000 he continually traded for 313 days of the year which does not seem questionable. However, in 2001 he only traded 72 days and in 2002 traded only 84 days. Because he traded only a portion of the year, he failed to comply with condition 3 and 5 of IRS publication 550:

4 ) Must carry on the activity with continuity and regularity.
5) The frequency and dollar amount of the trades during the year.

Additionally he held his positions over 30 day for all years in question thus he failed to comply with condition 1 and 4 of IRS Publication 550:

1) Must seek to profit from daily market movements in the prices of securities and not from dividends, interest or capital appreciation.
4) Typical holding period for securities bought and sold.

Don’t let an Ape make a monkey out of you. The IRS has given traders a great tool to deal with the capital loss limitation of $3,000. Bad advice not only cost Mr. Kay days in tax court, but also caused penalties, interest, and forced him to reclaim his losses over the next 684 years! With so much to lose, why take a second chance on your taxes?

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