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Mr. Kelly contends that his options trading activity was
sufficiently regular, substantial, and time-consuming to
constitute a trade or business for Federal income tax purposes,
so that the losses arising from the activity qualify for ordinary
treatment. This argument confuses a necessary with a sufficient
condition. Buying and selling securities on an exchange must
constitute a trade or business in order for the securities to
qualify for the exception to capital asset treatment. But a
taxpayer who meets this trade or business requirement may be
either a trader or a dealer. Unless he is a dealer, the
securities he holds in connection with his business are capital
assets. Laureys v. Commissioner, 92 T.C. 101, 136-137 (1989);
King v. Commissioner, 89 T.C. 445, 457-458 (1987); Polacheck v.
Commissioner, 22 T.C. 858, 862 (1954); Kemon v. Commissioner, 16
T.C. 1026, 1032-1033 (1951). The distinction between trader and
dealer turns on whether the taxpayer's business activities have
the characteristics specified in section 1221(1). The parties
have stipulated that Mr. Kelly's options trading lacked these
characteristics: Mr. Kelly did not hold his options as
inventory; he did not sell to customers; he performed no
merchandising function. Therefore, if he was engaged in the
business of buying and selling options, it was as a trader rather
than a dealer, and the options would not constitute property
described in section 1221(1). Kemon v. Commissioner, supra;
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