Can I Deduct Household Expense for Trading Stocks Online?
Original post by Jonathan Langsdorf of Demand Media
It may be possible to deduct some of your home expenses if you are an active trader. The determinant is whether your stock market activity allows you to claim trader status as compared to investor status. Even with trader status, the amount of your deductions will be limited.
Full Time Trader
To qualify for trader status on your tax return, your stock trading must be an ongoing activity generating a significant portion or your income and involving larger amounts of money. If you are trading with just a few thousand dollars, you will not qualify. The IRS does not have specific rules for qualification, but trading activity of 500 trades per year is usually considered to be sufficient. Many traders set up their trading as a separate business entity to show trading income separately from other income.
If you qualify for trader tax status, many of your expenses become deductible as business expenses. Typical expenses include computers and software, books and training materials. Courses, seminars and expenses to go to trading oriented conventions would also qualify as deductible business expenses for the full time trader. These are expenses an individual classified as an investor would not be allowed to deduct.
With trader tax status, trading is your business and you can deduct expenses associated with a home office. The space in your home used for your trading business must be set aside exclusively for trading. You can then deduct a proportional share of household expenses. For example, if your home has six rooms and you use one room as your trading room and for no other purpose, you could use one-sixth of IRS accepted expenses as a tax deduction.
The rules for deducting home expenses due to business use are listed in IRS Publication 587, Business Use of Your Home. Some of the expenses listed in the publication eligible for deduction as a home office include real estate taxes, insurance costs, mortgage interest or rent, utilities, security expenses and home maintenance. Home expenses that are 100 percent related to your trading business can be fully deducted. General household expenses can only be deducted up to the proportional amount of your home used as the home trading office.
- Green Trader Tax: Trading Business Expenses
- TraderStatus.com: Am I a Trader?
- Green Trader Tax; Arguments to Use in IRS Exams, Appeals and Tax Court; January 2011
- IRS.gov: Publication 587
About the Author
Jonathan Langsdorf has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Langsdorf has a bachelor's degree in mathematics from the U.S. Air Force Academy.