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the extent allowed under sections 1211 and 1212. A capital asset
is property held by the taxpayer whether or not it is connected
with his trade or business. Sec. 1221. Section 1221(1),
however, creates an exception to the definition of a capital
asset for "stock in trade of the taxpayer or other property of a
kind which would properly be included in the inventory of the
taxpayer if on hand at the close of the taxable year, or property
held by the taxpayer primarily for sale to customers in the
ordinary course of his trade or business".
In determining whether a taxpayer who is purchasing and
selling securities is engaged in a trade or business, courts have
distinguished between "dealers", "traders", and "investors".
King v. Commissioner, 89 T.C. 445, 457 (1987). A dealer falls
within the section 1221(1) exception to capital asset treatment
because he deals in property held primarily for sale to customers
in the ordinary course of his trade or business. A trader, on
the other hand, holds securities as capital assets whether or not
such assets are held in connection with his trade or business.
This is so because a trader does not have customers and therefore
does not fall within the section 1221(1) exception to capital
asset treatment. King v. Commissioner, supra at 458; Kemon v.
Commissioner, 16 T.C. 1026, 1032-1034 (1951). Consequently,
taxpayers, unless they are dealers, generally recognize a capital
gain or loss upon the sale or exchange of stock.
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Last modified: May 25, 2011