Trading Taxes in the US
Trading taxes in the US are determined by the Internal Revenue Service (IRS). The IRS considers several factors, including whether an individual is in the ‘business’ or ‘trade’ of selling securities.
This article will explain tax laws, rules, and implications for US traders. It will cover asset-specific stipulations before concluding with preparation tips, including integrated tax software available at online trading brokers.
This page is not attempting to offer tax advice. It aims to unpack the various stipulations surrounding intraday income tax. If you remain unsure or have any queries about day trading with taxes, you should seek professional advice from an accountant and/or the IRS.
Last Updated: December 17 2025
Key Takeaways
- The Internal Revenue Service (IRS) is responsible for administering and collecting federal tax in the United States, including from online trading.
- The IRS will determine an individual’s tax status based on their classification as either a ‘trader’ or ‘investor’.
- US tax rates are arguably more favorable towards day traders, since trading-related expenses can be deducted, among other benefits.
- Day traders who qualify as a ‘trader in securities’ and make a valid section 475(f) mark-to-market election can generally avoid the usual wash-sale and capital-loss limitation rules on their mark-to-market trading positions.
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Investor vs Trader
Intraday income tax will depend on which category you fall into, ‘trader’ or ‘investor’. Unfortunately, determining this is complex and often done on a case-by-case basis. The IRS discusses how it distinguishes traders from investors in its guidance for individual filers.
As such, strict guidelines are set out across tens of thousands of pages of tax law, regulations and IRS guidance, which also considers decisions in relevant case law.
Investor
Those who do not qualify as a ‘trader’ will likely be seen as an investor in the eyes of the IRS. This comes with a less advantageous day trading tax rate in the US.
Most investors report sales of securities on Form 8949 and Schedule D (Form 1040). Many common investment expenses that used to be ‘miscellaneous itemized deductions‘ subject to a 2% of adjusted gross income (AGI) floor are no longer deductible for federal income tax purposes under current law, although investment interest expense can still be deducted on Schedule A to the extent of net investment income.
Because investing is generally not treated as a trade or business, investors ordinarily cannot claim the home-office deduction, and many expenses for equipment and tools used to manage personal investments are no longer deductible as miscellaneous itemized deductions under current federal law.
Under prior law, many investment-related expenses were grouped with other miscellaneous itemized deductions on Schedule A and were only deductible to the extent they exceeded 2% of AGI. These deductions have been eliminated for most taxpayers under current federal law, so many typical investment expenses (such as advisory fees) are no longer deductible at all on Schedule A, although investment interest expense remains separately deductible within its own limits.
Classification
Investors, like traders, purchase and sell securities. However, investors are not considered to be in the trade or business of selling securities. Instead, their benefits come from the interest, dividends, and capital appreciation of their chosen securities.
The key difference between whether you are entitled to page 1 deductions, as opposed to Schedule A deductions against income, rests on whether you’re in the ‘trade’ or ‘business’ of selling securities.
The bad news is that ‘trade’ or ‘business’ is not clearly defined. Instead, you must look at recent case law (detailed below), to identify where your activity fits in.
Trader
Those who spend their days buying and selling assets are probably going to fall under the ‘trader’ umbrella.
Classification
Day trading tax laws and recent cases tell us you’re a ‘trader’ if you meet the requirements tested in Endicott vs Commissioner, TC Memo 2013-199. Endicott is frequently discussed in tax cases and commentary on how courts distinguish between ‘traders’ and ‘investors’.
The two considerations were as follows:
1. The individual’s trading was substantial.
And,
2. The individual aimed to catch and profit from the price fluctuations in the daily market movements, rather than profiting from longer-term investments.
In this case, the taxpayer’s primary strategy was to purchase shares of stocks and then sell call options on the underlying stocks. He aimed to profit from the premiums received from selling call options against the corresponding quantity of underlying stock that he held.
He usually sold call options that held an expiry term of between one to five months. Endicott hoped the options would expire, allowing for the total amount of the premium received to be profit. He was not trading options on a daily basis, as a result of the high commission costs that come with selling and purchasing call options.
Endicott then deducted his trading-related expenses on Schedule C. This reduced his adjusted gross income. However, the IRS disagreed with the deductions and instead moved them to Schedule A. They insisted Endicott was an investor, not a trader.
Number Of Trades
One of the first things the tax court looked at when considering the criteria outlined above was how many trades the taxpayer executed a year. They also looked at the total amount of money involved in those trades, as well as the number of days in the year that trades were executed.
Endicott made 204 trades in 2006 and 303 in 2007. Then in 2008, he made 1,543 trades. The court decided that the number of trades was not substantial in 2006 and 2007, but that it was in 2008.
Amount Of Money
In 2006, Endicott made purchases and sales that totalled around $7 million. In 2007, the total was close to $15 million, and in 2008 it was approximately $16 million. The court agreed these amounts were considerable. However, they also stated, “managing a large amount of money is not conclusive as to whether a petitioner’s trading activity amounted to a trade or business.”
Key Points
From this case and other recent tax rulings in the US, a clearer picture of what is needed to satisfy the definition of ‘trader’ is appearing. The most essential of which are as follows:
- You spend a substantial amount of time trading. Ideally, this will be your full-time occupation. If you are a part-time trader, you need to be buying and selling several assets pretty much every day.
- You can demonstrate a regular pattern of making a high number of trades, ideally almost every day the market is open.
- Your aim is to profit from short-term price fluctuations, rather than long-term gains.
‘Trader’ Benefits
The US day trading tax rate looks favorably on the ‘trader’. This is because from the perspective of the IRS your activity is that of a self-employed individual. This allows you to deduct all your trade-related expenses on Schedule C.
This includes any home and office equipment, plus educational resources, phone bills and a range of other costs. However, it is important to keep receipts for any items, as the IRS may request evidence to prove they are used solely for trade purposes.
If you qualify as a trader in securities, your trading activity is treated as a trade or business even though you have no customers. You generally report your trading-related business expenses on Schedule C (Form 1040), and these deductions reduce your adjusted gross income and are not subject to the former 2% miscellaneous itemized deduction floor.
However, your gains and losses from selling securities are still reported on Form 8949 and Schedule D unless you’ve made a valid mark-to-market election.
In addition, interest on money you borrow to trade (including margin interest) is generally treated as investment interest expense and may be deductible (typically on Schedule A) subject to the net investment income limits, and you don’t have to pay self-employment tax on your net profit from trading.
Mark-To-Market Traders
There is another advantage, and that centers around day trader tax write-offs. Normally, selling an asset at a loss allows you to write off that amount. However, if a trader, their spouse, or a company they control buys the same stock within 30 days, the IRS deem this a ‘wash sale’ (further details below).
This challenge can be avoided if the trader becomes a ‘mark-to-market’ trader. With a valid section 475(f) mark-to-market election, a trader’s qualifying trading positions are generally exempt from the usual capital-loss limitation and wash-sale rules, although wash-sale rules can still apply to separate investment or retirement accounts.
On the last trading day of the year, the trader would effectively sell all holdings. They still hold those assets, but they book all the supposed gains and losses for that day. They would then enter the new year with zero unrealized gains or losses. It would appear as if they had just re-purchased all the assets they supposedly sold.
This brings with it another advantage, in terms of taxes on day trading profits. Usually, investors can deduct just $3,000 or $1,500 in net capital losses each year. Mark-to-market traders, however, can deduct an unlimited number of losses.
If you do qualify as a mark-to-market trader, you should report your gains and losses on part II of IRS form 4797. For further clarification, see the discussion of the mark-to-market election in IRS Topic No. 429, Traders in securities, and in Revenue Procedure 99-17 in Internal Revenue Bulletin 1999-7.
Wash-Sale Rule
There is an important point worth highlighting around day trader tax losses. In particular, the ‘wash-sale’ rule. This rule is set out by the IRS (in section 1091 of the Internal Revenue Code) and prohibits traders from claiming losses for the trade sale of a security in a wash sale.
A wash sale takes place when you trade a security at a loss, and then within thirty days either side of the sale, you, a partner, or a spouse purchases a ‘substantially identical’ instrument. If the IRS refuses the loss as a result of the rule, you will have to add the loss to the cost of the new security. This would then become the cost basis for the new security.
For further guidance on this rule and other important US trading regulations and stipulations, see our guide to trading rules.
Application
If you qualify as a trader in securities but do not make a mark-to-market election, you still report your sales on Form 8949 and Schedule D and are subject to the usual capital loss limits (generally, up to $3,000 of net capital losses per year, or $1,500 if married filing separately, with excess carried forward).
If you have a valid section 475(f) mark-to-market election in place, your trading gains and losses are generally reported as ordinary income or loss on Form 4797 instead, and the capital-loss limitation does not apply to those mark-to-market positions.
Schedule C should then have just expenses and zero income, whilst your trading profits are reflected on Schedule D. To prevent any confusion, it’s a useful tax tip to include a statement detailing your situation.
Examples
Whilst it isn’t crystal clear, below are typical scenarios to help you see where your activity may fit in.
- Example 1 – Let’s say you spend 8-10 hours trading a week and you average around 250 sales a year, all within a few days of your purchase. The IRS is likely to say you don’t spend enough time trading to satisfy the ‘trader’ criteria.
- Example 2 – Let’s say you spend around 20 hours a week trading, and you average around 1,250 short-term trades in a single year. The IRS should permit your takings as a day ‘trader’ on your tax return.
It is also worth bearing in mind that it is possible to be both a ‘trader’ and ‘investor’. If this were the case, traders should separate long-term holdings and keep detailed records to distinguish between both sets of activities.
Tax Terminology
A few terms that will frequently crop up when dealing with trading tax in the USA are:
Cost Basis
This represents the amount you initially paid for a security, plus commissions. It acts as a baseline figure from where taxes on day trading profits and losses are calculated. If you close out your position above or below your cost basis, you will create either a capital gain or loss.
Capital Gains
A capital gain is simply when you generate a profit from selling a security for more money than you originally paid for it, or if you buy a security for less money than you received when selling it short. Both traders and investors can pay tax on capital gains.
Normally, if you hold your position for less than one year, it will be considered a short-term capital gain, and you will be taxed at the usual rate. However, if you hold the position for more than one year, your profit is usually taxed at the preferential long-term capital gains rates, which are currently 0%, 15%, or 20% depending on your taxable income and filing status.
Capital Losses
A capital loss is when you incur a loss when selling a security for less than you paid for it, or if you buy a security for more money than you received when selling it short.
Typically, for the purposes of taxes for day trading, you can write off (deduct) capital losses, up to the number of capital gains earned this year.
If you suffer more losses than gains in a year, you could write off an additional $3,000 on top of your offsetting gains. If your losses exceed the additional $3,000, you then have the option to carry those losses forward to the next tax year, where you would have another $3,000 deduction allowance.
Asset Specific Taxes
With vast differences between instruments, many rightly question whether there are different tax stipulations you need to be aware of if you are trading in a variety of instruments. However, on the whole, the IRS is more concerned with why and how you are trading, than what it is you’re trading.
In many cases, day trading options is taxed similarly to stock trading, but some instruments, especially forex contracts, can fall under different rules (for example, section 988 ordinary income/loss or, in some cases, section 1256), so it’s important to confirm how a specific product is treated. Having said that, there remain some asset-specific rules to take note of.
Futures
Many exchange-traded futures and certain index options are ‘section 1256 contracts’. Gains and losses on these contracts are marked to market at year-end and treated as 60% long-term and 40% short-term, regardless of how long you held the position. The 60% portion is taxed at the applicable long-term capital gains rate (currently 0%, 15%, or 20%, depending on your taxable income), while the 40% portion is taxed at your ordinary income rate.
Not all futures or derivatives qualify as section 1256 contracts, so traders should confirm how a particular product is classified for tax purposes.
So, while many of the core concepts (such as whether you are treated as a ‘trader’ or ‘investor’) apply across instruments, some products, especially certain forex contracts and section 1256 contracts, can be taxed under different Code provisions (such as section 988 or section 1256) that may result in ordinary income or blended 60/40 capital gains treatment rather than the standard rules that apply to share trading.
It’s therefore important to confirm how each specific product is treated for tax purposes.
Tax Preparation
Keep A Record
To avoid any last-minute confusion or hassle, it is important to keep a record of the following:
- Instrument
- Price
- Purchase & sale date
- Size
- Entry & exit point
Having this information to hand will make taxes on trading US stocks a stress-free procedure. The IRS emphasizes maintaining detailed records of trades, including dates, prices, and basis, in its guidance on capital gains and in Publication 550.
Day Trader Tax Software
There now exists trading tax software that can speed up the filing process and reduce the likelihood of mistakes. This tax preparation software allows you to download data from online trading brokers and collate it in a straightforward manner.
Forex.com, for example, offers a Performance Analytics tool which assesses the past 12 months of your trading data, including P&L figures.
Final Word
Taxes on income will vary depending on whether you are classed as a ‘trader’ or ‘investor’ in the eyes of the IRS. Unfortunately, few qualify as traders and receive the benefits that brings.
Traders should be warned that the consequences of failing to pay the correct amount, or late payments, can result in severe ramifications. These can include accuracy-related penalties and additions to tax for late payment, as described in the IRS guidance on penalties.
Recommended Reading
Article Sources
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