Investors and traders alike have had a taxing two years. (You didn't think we could resist that one, did you?) But traders have some distinct tax advantages in terms of managing expenses and maximizing losses -- both of which have become increasingly important since the heady days of daytrading peaked. The Internal Revenue Service distinguishes traders from investors pretty much the same way we all do: Investors buy and sell securities for long-term capital gains, as well as to garner dividends, while traders buy and sell securities in an effort to profit from daily price swings. The IRS doesn't have a definitive definition of "trader," nor has it issued rulings for determining trader status. Because traders are considered to be in business, expenses incurred in operating your business -- everything from margin interest to computer equipment -- are deductible as ordinary business losses on Schedule C of Form 1040. You can also claim a home-office deduction, provided the space (including your computer) is used exclusively for business. That deduction is claimed on Form 8829. Investors, no matter how seriously they work, aren't afforded the home office deduction, and their deductible expenses are extremely limited. Traders generally report capital gains and losses on Schedule D, just as investors do. (In an effort to distinguish long-term investments from the trading that represents your "business," it's best to keep the former in a separate account.) Since a trader's sales are, by definition, short-term bets, most gains and losses will be short-term gains and losses (defined by the IRS as held for 12 months or less). Short-term gains reported on Schedule D are taxed at your ordinary income rate; however, traders do not owe self-employment tax on those gains. (Self-employment tax, which is calculated on Schedule SE, provides funds for Social Security and Medicare benefits.) That's some good news. There's some bad news, though, for traders having a bad year. When it comes to capital losses, the same rules that govern typical investors also apply to traders. Capital losses that get reported on Schedule D first must be offset against any capital gains reported on Schedule D. If losses outstrip gains, you can use the losses to offset some ordinary income -- but only up to $3,000. Any excess losses can be carried over to future years, but it won't help with this year's tax burden.