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Dealers, or principals, buy and sell securities for their own accounts, adding liquidity to the marketplace and seeking to profit from the spread between the prices at which they buy and sell.
In the over-the-counter market, in most cases, it is dealers -- also called market makers -- who provide the bid and ask quotes you see when you look up the price of a security.
Those dealers are willing to commit their capital to specific securities and are ready to trade the securities at the quoted prices.
In tax law,persons who buy and sell property for their own account,whether that property consists of silver spoons,trading cards,or real estate.Investors want to avoid dealer status because:
• Gains on sales are treated as ordinary income rather than the more favorably treated capital gains, no matter how long you hold a particular piece of property.
• Dealers have to pay self-employment taxes on their income.
• Dealers cannot take advantage of installment sales provisions that allow others to pay taxes over time, as they receive installment payments from the purchaser. Dealers must pay income taxes on the entire profit, even if they receive payments over many years.