I have heard that there is a way to have capital gains listed as
ordinary income on tax returns if one’s occupation is exclusively,
that of an active private investor, but I am unable to find a
reference for this.  For several years while living abroad my sole and
only income was from active trading of stock options.  I was not a day
trader; but made hundreds of short term (days to a few weeks) trades. 
 I considered that I was self-employed, and this was my full time job
during that period

When I had earlier lived abroad and worked as a technical consultant,
my income was exempt under the foreign earned income exclusion.  As I
merely traded jobs (from being a consultant to being a private
investor), I assumed that my income would still be exempt but I can’t
find the rules here.  Help.

Hello and thank you for your question.

The investment universe has three component members:  investors,
traders and dealers.  Since you are not a dealer (because you do not
maintain an inventory that you hold for sale to the public) you are
either an investor or a trader.  Investors generate capital gains and
losses, while traders generate ordinary gains and losses.  Hence to
qualify for ordinary income and loss treatment you need to be a
trader.

According to the IRS, "[a] business is generally an activity carried
on for a livelihood or in good faith to make a profit. Rather than
being defined in the tax code, exactly what activities are considered
business activities has long been the subject of court cases. The
facts and circumstances of each case determine whether or not an
activity is a trade or business. Basically, if your day trading
activity goal is to profit from short-term swings in the market rather
than from long-term capital appreciation of investments, and is
expected to be your primary income for meeting your personal living
expenses, i.e. you do not have another regular job, your trading
activity might be a business."
Frequently Asked Tax Questions And Answers
Keyword: Day Trader
http://www.irs.gov/faqs/page/0,,id%3D15846,00.html

Publication 550, Investment Income and Expenses, which is specific to
traders, includes a section titled Special Rules for Traders in
Securities.
http://www.irs.gov/pub/irs-pdf/p550.pdf

There is an excellent discussion of this issue at
A day in tax court: am I really a Trader?
http://www.investopedia.com/articles/trading/02/022502.asp

I won't copy the article here because of copyright considerations, but
you should read it closely--particularly its discussion of the factual
questions that distinguish traders from investors, and the many tax
benefits that traders enjoy.  [capital gains are only tax-favored if
they are long-term, i.e. held more than a year; so an investor with
short-term gains has no better tax result than a trader, and the
investor misses out on many tax benefits described in the article]

Search terms used:
investor trader ordinary capital options

I hope you find this information useful.  If any of it is unclear,
please request clarification.  I would appreciate it if you would hold
off on rating my answer until I have an opportunity to respond.

Sincerely,
Google Answers Researcher
Richard-ga

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Request for Answer Clarification by amsterdam-ga on 18 Apr 2003 13:39 PDT

Thank you for your excellent answer and I apologize for the delay.  I
will rate you five stars and leave a tip after I've had a chance to
get my papers together and get with my tax preparer.  I had a capital
loss carry forward from a business AND I was living abroad.  I assumed
that as I was living in The Netherlands that I would get the foreign
earned income exclusion - but my tax preparer applied my capital loss
carry forward instead.  Now that I'm back in the states, I could use
that tax loss against my current income - I hope to be able to amend
those past returns and do so.

When this works I'll leave a tip - plus five stars.

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Clarification of Answer by richard-ga on 19 Apr 2003 06:10 PDT

Thanks for the kind words, and best of luck.
Sincerely
richard-ga

Unfortunately this, plus H & R Block, were not enough for me to claim
that gains from active trading while abroad were covered under foreign
earned income.

You'll have difficulty proving your activity falls under the category
of a trader business. There are several rules that must be satisfied.
For example, you need to show that there was regular activity as
opposed to purchases for investment purposes. The IRS publication you
want to refer to is pub. 550 page 68.

http://www.irs.gov/pub/irs-pdf/p550.pdf