Booyah Breakdown: Taxes for Traders II

Editor's note: As a special feature for March, TheStreet.com offers an ongoing series on everything you need to know about taxes. Today is part six.

OK, pour yourself a drink (a stiff one!) and settle in. We've got some heady tax stuff to talk about today.

Last week we talked about the differences between investors and traders for tax purposes. In a nutshell, it's basically the difference between hobbyists and professionals. Investors invest to increase wealth, but it's really a sideline to their day jobs. For traders, trading is their day job. It puts bread on the table and pays the rent.

The good news is that Internal Revenue Service then treats trading like a business and offers two great tax breaks:

• Capital gains and losses. Typically, your deductible losses are limited to the amount of your capital gains, plus an additional $3,000 a year. But traders have the option of taking an unlimited amount of losses, which can be used to offset any income.
• Business expenses. Because trading is their business, traders can deduct 100% of their expenses, including the cost of their computers and software, tax advice and instructional materials on investing.

This week's Booyah Breakdown is going to delve into the details of these perks now!

Big note: There are no special forms for traders, no box you check to notify the IRS of your special status. But there are specific things traders must do on their returns to alert Uncle Sam to their status and to claim the tax benefits to which they're entitled. Let's look at some of them in depth.

Capital Gains and Losses

Investors and traders who suffer capital losses report those losses on Schedule D -- Capital Gains and Losses. The deduction for those losses is limited to the amount of your capital gains plus $3,000.

But the Taxpayers' Relief Act of 1997 created a special tax break for traders that allows them to avoid that $3,000 loss limitation by electing to "mark to market" their positions at year-end.