Dealers are distinguished from investors and traders because they have customers and derive their income from marketing securities for sale to customers or from being compensated for services provided as an intermediary or market-maker. Dealers also can hold themselves out as willing to enter into, assume, offset, assign or otherwise terminate positions in securities with customers in the ordinary course of the trade or business. Dealers regularly purchase or sell securities to their customers in the ordinary course of their trade or business. DealersÄealers in securities may be individuals or business entities. For more information on investors, refer to Publication 550, Investment Income and Expenses. Investment income isn't subject to self-employment tax. 703, Basis of Assets for additional information. Commissions and other costs of acquiring or disposing of securities aren't deductible but must be used to figure gain or loss upon disposition of the securities. Investors are subject to the capital loss limitations described in section 1211(b), in addition to the section 1091 wash sales rules. Sales of these securities result in capital gains and losses that must be reported on Schedule D (Form 1040), Capital Gains and Losses and on Form 8949, Sales and Other Dispositions of Capital Assets as appropriate. Most investors are individuals and hold these securities for a substantial period of time. They buy and sell these securities and hold them for personal investment they're not conducting a trade or business. Investors typically buy and sell securities and expect income from dividends, interest, or capital appreciation. To better understand the special rules that apply to traders in securities, it's helpful to review the meaning of the terms investor, dealer, and trader, and the different manner in which they report the income and expenses relating to their activities. In general, under section 475(c)(2), the term security includes a share of stock, beneficial ownership interests in certain partnerships and trusts, evidence of indebtedness, and certain notional principal contracts, as well as evidence of an interest in, or a derivative financial instrument in, any of these items and certain identified hedges of these items. This topic also discusses the mark-to-market election under Internal Revenue Code section 475(f) for a trader in securities. This topic explains if an individual who buys and sells securities qualifies as a trader in securities for tax purposes and how traders must report the income and expenses resulting from the trading business.
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