Money Matters: How to determine if securities trading is a trade or business

 James W. Rahmlow, The Daily Record Newswire

Especially in situations where a taxpayer’s trading activity is short-term and subject to ordinary income tax rates, taxpayers often want to consider their trading as a trade or business so that they can offset the gains with ordinary and necessary business expenses. The IRS has in the past considered the frequency, extent and regularity of the taxpayer’s transactions. The IRS has long held that the size of the transactions was not determinative of whether the taxpayer’s trading activity was substantial.

In Nelson, TC Memo. 2013-259, a taxpayer in one year executed 235 trades over the course of 66 trading days and claimed that this was a legitimate trade or business. There are no exact guidelines to be followed to determine what is substantial, but in prior cases, it has been held that 300 trades in a year was not substantial and 1,100 trades was substantial. While the dollar value of the trades in question was in excess of $23 million, the lack of sufficient frequency was determinative. It did not meet the prior 300 trade threshold and thus was not considered substantial. The court also upheld the application of a 20 percent accuracy-related penalty.

IRS issues Applicable Federal Rates for December 2013

In a recent revenue ruling (2013-26), the IRS issued its Applicable Federal Rates and Adjusted AFRs for December 2013. Below is a summary of those rates on a monthly basis.


Short Mid Long

Term Term Term

Applicable Federal Rates (AFR)

0.27% 1.71% 3.32%

Adjusted AFRs

0.27% 1.71% 3.32%


While the determining methodology is different, as sometimes happens, the results are exactly the same.

A victory for taxpayers

While flexible spending arrangements (health FSAs) for health costs are generally viewed as positive, one disadvantage has always been the “use it or lose it” provision. For plan years starting before 2013, if a taxpayer did not fully utilize the amount set aside in in the health FSA, it was lost to the taxpayer, although the taxpayer still got a tax deduction for the portion not used.

In a recent notice (2013-71), the IRS announced that taxpayers may now carryover an unused balance of up to $500 to the subsequent plan year, and could use this amount in that subsequent plan year and not have the carryover portion counted toward the following year’s $2,500 inflation-adjusted-salary-reduction limit. Unused amounts in excess of $500 may not be carried over and are lost to the taxpayer. Please note that the qualified plan must be amended to allow for the carryover provision.

IRS releases 2014 inflation-adjusted estate and gift tax amounts

The IRS recently announced that the annual gift tax exclusion will remain at $14,000 for 2014, unchanged from 2013. However, the estate and gift tax exclusion does increase from $5,250,000 in 2013 to $5,340,000 in 2014. Note that these are only for federal purposes.

Minor changes in retirement plan amounts as cost of living adjusted for 2014

While the majority of retirement plan limits remained unchanged in 2014 after adjusting for cost of living adjustments (COLA), there were a couple of changes. Defined contribution plans, which previously had maximums of $51,000 in 2013 will now have a 2014 maximum of $52,000. Also, for defined benefit plans, the maximum annual benefit that can be paid has increased from $205,000 in 2013 to $210,000 in 2014.  Finally, the maximum amount of compensation counted for an eligible employee in a qualified plan increased to $260,000, a $5,000 increase over 2013.

Increase in Social Security wage base

While previous increases mentioned in this article were pegged to adjustments in the cost of living, changes in the Social Security Wage Base move in relation to the national average wage index. For 2013, this maximum was $113,700. For 2014, the maximum increases to $117,000.

Ability to file online for employer identification number

While it is not an alternative for taxpayers who need to apply for a taxpayer identification number, the IRS does allow individuals to apply online for single identification numbers at EINs are issued for the purpose of tax administration and are not intended for participation in any other activities such as a tax lien auction.

To obtain a number in a relatively effortless fashion, go to the Internal Revenue Service website mentioned above and click on “Apply for an EIN Online” under the tools section. You will then be prompted to answer the questions asked. After all validations are done, you will immediately receive your EIN, which you can then download and save, along with an EIN confirmation notice.


James W. Rahmlow, CPA, is a partner with Mengel, Metzger, Barr & Co. He can be contacted at