An investor typically purchases and sells financial instruments with the intent to hold securities for a longer period for capital appreciation. A trader is a professional investor frequently buying and selling financial instruments to seek profit. Generally, a trader fund is engaged in the trade or business of trading securities. Courts usually look at the nature of the income, frequency and regularity of the transactions and investment intent. Because there is no definition provided by either the Internal Revenue Code (“IRC”) or Treasury Regulations, the guidance comes from case law or audit manuals. The determination, which is made at the partnership level, as to whether a hedge fund is a trader fund or an investor fund is based on facts and circumstances. Trader Funds, Investor Funds, and Fund of Funds The first step in determining the proper treatment of income and expense items is to identify whether the partnership is a trader fund, investor fund, or fund of funds. This article will help you navigate K-1s to understand how certain items would impact the tax treatment at the individual level. Hedge fund K-1s can be voluminous and difficult when determining how to handle the tax treatment of the income and deductions at the individual level.
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