I am currently a graduate student earning a stipend. I am interested in trading a portfolio of 50 stocks, and plan to rebalance them quarterly. This would result in at least several hundred stock transactions each year. Given that I am reporting myself as a student, would the volume of stock transactions be considered high enough to trigger an audit?
The question raises a common concern among taxpayers. The number of transactions should not have an impact on potential audit activity. What is more important is the accuracy of the reporting of the transactions, including the proper gross revenue from the sales, the proper presentation of tax basis, and the proper classification as to short-term and long-term activity. Also, you should be cognizant of the “wash sale” rules.
I would suggest that you consult a CPA to discuss the benefits of electing to being classified as a “day trader” if the trading activity rises to a high level.
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Answered by: Nicholas J. Crocetti, CPA, is a retired director of tax advisory solutions with CBIZ MHM LLC in Plymouth Meeting, Pa.