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whether or not connected with his trade or business. Section
1221(1), however, creates an exception to the definition of a
capital asset:
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 * * *
Consequently, taxpayers, unless they are dealers, generally
recognize capital gain or loss upon the sale or exchange of their
stock, rather than ordinary gains or losses. In determining
whether a taxpayer who is purchasing and selling securities is
engaged in a trade or business, courts have distinguished between
a dealer, a trader, and an investor. See Estate of Yaeger v.
Commissioner, 889 F.2d 29 (2d Cir. 1989), revg. on another issue,
affg. in part, and remanding T.C. Memo. 1988-264; see also
Moller v. United States, 721 F.2d 810, 813 (Fed. Cir. 1983).
A dealer does not hold securities as capital assets if held
in connection with his trade or business. 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. A
trader does not have customers and is therefore not considered to
fall within an exception to capital asset treatment. King v.
Commissioner, 89 T.C. 445, 458 (1987); Kemon v. Commissioner, 16
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Last modified: May 25, 2011