The NASD passed new margin rules in September 2001 that require active
traders to have $25,000 of trading capital for active traders. These rules
apply to anyone who fits the SEC's new definition of a "pattern day
trader" (PDT). We explain how these rules may effect your trader
tax status and tax matters.
GTT RESOURCES: TRADER TYPES: PATTERN DAY TRADERS
page on new rules
One of our GTT Trader Tax Preparation clients sent us this e-mail
asked before and was told the new SEC ruling would not affect me. I was
looking at your website for more information and couldn't locate any.
If there is a link or article I overlooked...would you please tell me
where to find it? (We added this page afterwards).
"I've learned from CyberTrader that a new account will be created
that will be considered a "Day Trading Account", it has various
requirements and restrictions. Explicitly, to be termed a day trader,
you must make four intraday trades in a five day period. Sometimes I do,
sometimes I don't...sometimes I hold overnight...sometimes I hold a month
or so. So, am I a day trader or not? My concern is that the IRS will pull
up the new "Day Trading Account" ruling and say...if you didn't
participate in this kind of account...you are not a day trader and therefore
unable to claim MTM status...which I am heavily counting on for 2001 taxes.
Am I going to be able to claim MTM status in 2001?" Great question.
Here was our answer to the above e-mail question
The new NASD regulation margin requirements for "pattern day
trader" are not coordinated with the IRS rules for trader
tax status. The new margin rules do not set precedent for the
IRS classification of who qualifies for trader tax status (i.e., rises
to the level of being in the trading business). Therefore, this new
rule does not affect nor change the current IRS requirements for who
qualifies for trader tax status.
An example of a someone who is not a PDT but may qualify for trader tax
An active trader has four brokerage accounts, but he is not classified
as a PDT in any of the accounts. When you look at all four accounts together,
the trader would be deemed a PDT and also qualify for trader tax status.
If you are a Pattern Day Trader, it helps you qualify for trader tax
It seems obvious to us that if you are classified as a PDT, the IRS would
be more willing to accept on the face of things (without examining your
trading records) that you might qualify for trader tax status.
However, if you are a part-time PDT
This means if you also have another job, you should purchase our GTT
Guide: Trader Tax Status and Mark-to-Market Accounting to make sure
you qualify for trader tax status. See the "What's
New" section of this Guide.
Note of caution
We have been contacted by many traders who have complained
about the new PDT rules. These traders don't have the necessary $25,000
of capital required to open a PDT account. Prior to the new PDT rules,
smaller traders could operate a trading business with $5,000 of capital.
Now, smaller traders have few choices if they want to be in the trading
One option is to take one of the many proprietary trading "jobs"
or LLC opportunities currently being advertised. See what we think
of proprietary trading on our separate Proprietary
If you have questions about PDT, e-mail firstname.lastname@example.org
For more information about trader tax status
and how it relates to PDT, we suggest you view our following guides. You
can click below to purchase them, or visit our Guide
2004 Guide: Trader
Tax Law & Benefits
(includes Trader Tax Status, Mark-to-Market Accounting, Net
Operating Losses, Case Law & IRS Exams, Securities vs.
Commodities, Entities, Retirement & Fringe Benefit Plans,
Proprietary Trading, Self Employment Taxes, Tax Planning and
Click Info for Highlights, Table of Contents and Introduction.
Ready for a consultation
with a GTT CPA