I believe I can offer a very clear and concise method the courts could take in the day trading arena ( “Day Trading and Self-Employment Taxes” [ JofA , Jan.01, page 80] ).
Since the primary question is what constitutes a trade or business, that determination could be made based on whether one holds a securities license.
Before the advent of day trading, the only “real” traders were brokers or dealers in securities. In addition to meeting various state requirements, those individuals qualified under either NYSE or NASD rules to become licensed. The modern-day traders meet no such requirements because they do not deal with the public. I think this distinction alone can determine whether the activity constitutes a trade or business, or is an investment activity.
Unless a distinction is made along some similar line, numerous court cases could be decided on either side of the argument for years to come.
Dale Schwartzenhauer
Jim Johnson & Co.
Walla Walla, Washington
