IRS Sets Offset Limits on Ordinary Income With Capital Losses

The following is a real life example of day trading activities and how the IRS and the Tax Court handle every day reporting mistakes.

In the case of Shahrooz Jamie who was a physician who was also a day trader of securities, buying and selling on his own account. He was looking for a profit on short-term fluctuations in the market by buying and selling the same stock within a few days. There were no other customers he traded for, he earned no commissions for the activity, and he did not maintain a place of business for this trading activity. He did not hold the securities to earn dividends. For Federal tax purposes, Shahrooz was not a dealer in the securities he traded.

During the tax years of 2000 to 2002, he reported his day trader activities on a Schedule C, claiming an ordinary loss on the sale of the securities. He used these losses to offset the income from his medical practice reported on a separate Schedule C, and also reported net operating losses for 2001 and 2002.

The stocks held by Shahrooz were determined to be a capital asset because he only purchased and sold securities on his own account and had no other customers. Losses from the sale of capital assets only allowed as capital losses.

The IRS determined that Shahrooz was trader holding capital assets and could only offset $3,000 of his ordinary income with his capital losses each year.

This case was held before the Tax Court in Shahrooz S. Jamie v. Commissioner, TC Memo 2007-22.