231 F.3d 1035 (7th Cir. 2000)
Gary K. Bielfeldt and Carlotta J. Bielfeldt, Petitioners-Appellants,v.Commissioner of Internal Revenue, Respondent-Appellee.
No. 00-1747
In the  United States Court of Appeals  For the Seventh Circuit
Argued September 27, 2000Decided November 8,  2000

Petition to Review Decision  of the United States Tax Court.  No. 5936-96--David Laro, Judge.
Before Posner, Coffey, and Kanne, Circuit  Judges.
Posner, Circuit Judge.


1
Gary Bielfeldt  (and his wife, but she is a party only by  virtue of having filed a joint return  with her husband), a large trader in U.S.  Treasury notes and bonds, seeks to  overturn a decision by the Tax Court  denying him the right to offset immense  trading losses that he incurred in the  1980s against all but $3,000 a year in  ordinary income. He claims to be not a  trader but a dealer and that the losses  he incurred in the sale of the Treasury  securities were losses connected with his  dealer's "stock in trade"; such losses,  even when they result as his did from the  sale of a capital asset, are treated as  ordinary rather than capital losses and  can therefore be fully offset against  ordinary income. 26 U.S.C. sec. 1221(1).  In contrast, capital losses, while they  can be fully offset against capital  gains, can be offset against ordinary  income only up to $3,000 a year. 26  U.S.C. sec. 1211(b); Marrin v. IRS, 147  F.3d 147, 150-52 (2d Cir. 1998). Although  the amount is arbitrary, the rationale  for limiting such offsets is not; it is  to reduce taxpayers' incentives to so  structure their capital transactions as  to realize losses today and defer gains  to the future. See Robert H. Scarborough,  "Risk, Diversification, and the Design of  Loss Limitations Under a Realization-  Based Income Tax," 48 Tax L. Rev. 677,  680-81 (1993); Alvin C. Warren, Jr., "The  Deductibility by Individuals of Capital  Losses Under the Federal Income Tax," 40  U. Chi. L. Rev. 291, 310-14 (1973). If  Bielfeldt's characterization of his  status is sound, he is entitled to some  $85 million in refunds of his federal  income tax.


2
The standard distinction between a  dealer and a trader is that the dealer's  income is based on the service he  provides in the chain of distribution of  the goods he buys and resells, rather  than on fluctuations in the market value  of those goods, while the trader's income  is based not on any service he provides  but rather on, precisely, fluctuations in  the market value of the securities or  other assets that he transacts in. Marrin  v. IRS, supra, 147 F.3d at 151; United  States v. Wood, 943 F.2d 1048, 1051-52  (9th Cir. 1991); United States v.  Diamond, 788 F.2d 1025, 1029 (4th Cir.  1986). This is not to deny that a trader,  whether he is a speculator, a hedger, or  an arbitrageur, serves the financial  system by tending through his activities  to bring prices closer to underlying  values, by supplying liquidity, and by  satisfying different preferences with  regard to risk; he is not a parasite, as  the communists believed. But he is not  paid for these services. His income from  trading depends on changes in the market  value of his securities between the time  he acquired them and the time he sells  them.


3
Although one thinks of a dealer's  inventory or stock in trade as made up of  physical assets, it can be made up of  securities instead. A stockbroker who  owned shares that he sold to his  customers at market price plus a  commission would be a bona fide dealer.  The example of a recognized "dealer" in  securities that is closest to Bielfeldt's  self-description because it blurs the  distinction between deriving income from  providing a service in the purchase or  sale of an asset and deriving income from  changes in the market value of an asset  is a floor specialist on one of the stock  exchanges. The specialist maintains an  inventory in a specified stock in order  to maintain liquidity. If its price  soars, indicating that demand is  outrunning supply, he sells from his  inventory to meet the additional demand,  and if the price of the stock plunges, he  buys in the open market in order to  provide a market for the people who are  trying to sell. See Bradford v. United  States, 444 F.2d 1133, 1135 (Ct. Claims  1971) (per curiam); Louis Loss,  Fundamentals of Securities Regulation  671, 792-93 (1983); Zvi Bodie, Alex Kane  & Alan J. Marcus, Investments 89-91 (3d  ed. 1996). He is not paid by the stock  market for this service, but is  compensated by the income he makes from  his purchase and sales and by commissions  on limit orders (orders contingent on a  stock's price hitting a specified level)  placed with him by brokers. United States  v. Bleznak, 153 F.3d 16, 18 (2d Cir.  1998); Fridrich v. Bradford, 542 F.2d  307, 309 n. 5 (6th Cir. 1976); Loss,  supra, at 671; Bodie, Kane & Marcus,  supra, at 90. The Internal Revenue  Service treats his gains and losses as  ordinary income because the Internal  Revenue Code classifies him as a dealer.  See 26 U.S.C. sec.sec. 1236(a), (d).


4
Treasury securities, at least the ones  in which Bielfeldt transacted, are not  sold on an organized exchange, and so  there are no floor specialists--there is  no floor. The market for Treasury  securities is an over-the-counter market,  like the NASDAQ. But the economic  function that the specialists on the  organized exchanges perform is  independent of the form of the market,  and dealers who specialize in Treasury  securities (called "primary dealers," and  discussed in the next paragraph) are  close analogues of the floor specialists,  just as NASD market makers are. There is  even a new law that requires the primary  dealers in Treasury securities, with some  exceptions, to register with the SEC or  the NASD. Government Securities Act of  1986, Pub. L. 99-571, sec.sec. 102(e) and  (f), 100 Stat. 3218, 15 U.S.C. sec. 78o-  5.


5
Bielfeldt claims that he performs this  function too, though he is not a  registered or primary dealer. The  securities in question are used to  finance the national debt. During the  period in which he incurred losses, there  was no talk of paying off the debt--on  the contrary, the debt was growing. To  finance growth and redemptions, the  Treasury would periodically auction large  quantities of bonds and notes, which  would be underwritten by a relative  handful of primary dealers. Bielfeldt  would buy in huge quantities from these  dealers and resell in smaller batches,  often to the same dealers, a few weeks  later. His theory, which worked well for  a few years and then turned sour, was  that the Treasury auctions were so large  that each one would create a temporary  glut of Treasury securities, driving  price down. He would buy at the depressed  price and hold the securities off the  market until, the glut having disappeared  (because he was hoarding the securities),  price rose, and then he would sell. He  argues that had it not been for this  service that he performed in the  marketing of Treasury securities, the  price the Treasury got at its auctions  would have been depressed, with the  result that interest on the national debt  would be even higher than it is.


6
What he is describing is simply the  social benefit of speculation. Think back  to the Biblical story of Joseph. During  the seven fat years, years of glut,  Joseph "hoarded" foodstuffs so that there  would be an adequate supply in the seven  lean years that he correctly predicted  would follow. In a money economy, he  would have financed the program by buying  cheap, which would be easy to do in a  period of glut, and selling dear, which  would be easy to do in a period of  scarcity and would help to ration  supplies in that period. He would buy  cheap yet pay higher prices than people  who were buying for consumption, since he  would anticipate a profit from the later  sale during the period of scarcity.  Similarly, Bielfeldt hoarded Treasury  securities during the fat weeks  immediately after an auction so that  there would be an adequate supply in the  lean weeks (the weeks between auctions)  that followed. That activity may have  been socially beneficial, as he argues,  but it is no different from the social  benefits of speculation generally. His  argument if accepted would turn every  speculator into a dealer for purposes of  the Internal Revenue Code. United States  v. Diamond, 788 F.2d 1025, 1030 (4th Cir.  1986).


7
Unlike a floor specialist, Bielfeldt  undertook no obligation to maintain an  orderly market in Treasury securities. He  did not maintain an inventory of  securities; and because he skipped  auctions that didn't seem likely to  produce the glut that was the basis of  his speculative profits, there were  months on end in which he could not have  provided liquidity by selling from  inventory because he had no Treasury  securities. In some of the tax years in  question he participated in as a few as 6  percent of the auctions, and never did he  participate in more than 15 percent. As a  result, he was out of the market for as  much as 200 days a year. He was a  speculator, period. As the Federal  Reserve Bank of New York, which kept  track of Bielfeldt's trading in Treasury  securities and sent updates to the IRS,  put it, "his activities are in most cases  outright speculation of interest rate  movements."


8
In saying that Bielfeldt was not a  specialist, we don't mean to imply that  the Internal Revenue Service would be  required to recognize as a dealer a  trader who structured his operation to  resemble that of a floor specialist but  was not a floor specialist as defined in  26 U.S.C. sec. 1236(d)(2). That issue is  not before us. Nor is the bearing of a  1997 statute, 26 U.S.C. sec. 475(f),  which allows a securities trader to treat  paper gains and losses as ordinary rather  than capital income by marking to market  the securities he owns at the end of the  tax year, that is, by pretending they had  been sold then. We note finally that  Bielfeldt's alternative argument, that  Treasury securities are "notes receivable  acquired in the ordinary course of trade  or business" and therefore are not  capital assets within the meaning of 26  U.S.C. sec. 1221(4), is frivolous. It  implies that no bonds, government or  private, are capital assets, since a  bond, like a note receivable, is a  promise to pay the holder of the  instrument.


9
Affirmed.

