When it comes to IRS Trader Tax Status As day traders in the US, the only efficient way to optimize your day trading income and losses is if you qualify for the Trader Tax status, which we’ll cover in just a little bit.
IRS Trader Tax Status
Another thing to be aware of if you’re filing as an investor status is the wash sale rule. This means that if you sell a stock for a loss both as a short term or long term investment, you cannot claim that capital loss if you hold the same position 30 days before or 30 days after the loss sale. Which is an extremely tough restriction, especially for day traders filing under the investor status.
This rule can easily turn your tax filing season into a nightmare. So make sure to talk to a certified tax professional when filing your taxes. Again, this is just a summary of what I know regarding day trading taxes in the US. talk to a CPA, it’ll make your life so much easier. I’m sure you know by now, filing as an investor status for your short term day trading or swing trading income really sucks. But what if you file as a TTS trader, Trader Tax status designated trader?
Spoilers, you get a lot better tax breaks, but the trader tax status is a lot harder to qualify which we will go over in a little bit. The biggest advantage of filing with a trader tax status is that you can deduct more than just the $3000 loss normal investor status tax filers have.
As a hyperactive day trader, each year you can claim all of your losses in the market against your total income. To do so you must make a “mark-to-market” election in Section 475 with the IRS by the tax filing deadline for the previous year. So if you want to make that mark to the market election for the 2020 tax year, then you must have that selection made by April 15, 2020 when you are filing for your 2019 tax return.
But again, that’s only if you qualify for the TTS designation. Another benefit of filing with TTS is that you are not bound by the wash sale rule we talked about earlier since you qualify for the mark to market accounting, which allows you to claim all your losses. But you must “pretend to sell all of your holdings on the last day of the year for tax purposes, and pretend to purchase them again in the new year.
This is just for accounting purposes, again, talk to your CPA about the specific details and your own tax situation. One more extremely generous tax break that TTS designated traders to have is the ability to write off trading expenses.
Almost anything you pay for in order to trade and make money with your trading business is considered tax-deductible. That means you can claim your scanners, newswires, computers, chat rooms, that $5000 DVD, internet bills, as well as part of your rent or mortgage if you work from home. This is once again, far superior to if you were filing ordinary income as a short term investor.
Because of the TCJA, Tax Cuts, and Jobs Act of 2017, what you can write off as expenses against your capital gains has been extremely limited. Now, how exactly do you qualify for this amazing trader tax status? There is actually no IRS statute or regulation. But here are some very general rules to see if you qualify for that status in the eyes of IRS.
You should be spending 30 hours or more on trading or trading related activities, and average about 4 or 5-day trader per day for most of the tax year. So if you are trading part-time 1 or 2 hours before work each day, you don’t qualify for TTS. Your average holding period should be less than 31 days, this should be an easy one for most day traders.
You should be treating trading as a business with the necessary software, research tools, and a significant trading account. If you are using subpar or free tools, nothing wrong with that, but I’m just saying, in the eyes of the IRS, you are not taking trading seriously enough as a primary business. And also if you are trading with a small account of $2000 or $5000, that’s not a significant enough amount for you to qualify for TTS designation.
Yes, we all know that getting the Trader Tax status is the most tax-efficient way to file your trading income, but its harder to qualify. This TTS designation is never guaranteed. A trader can qualify for TTS one year but not the next or only qualify for part of the year. if you do not meet the general requirements just talked about in the eyes of the IRS.
There are other ways to qualify, such as forming an LLC or a C corp. But please do your own research and talk toa CPA on that part.