Trader Tax Status (TTS) is a designation granted by the IRS to individuals who actively trade securities as their primary business. This status provides significant tax advantages, including the ability to deduct business expenses and elect mark-to-market (MTM) accounting. Understanding the criteria and benefits of TTS can help active traders maximize their tax savings.
Trader Tax Status is a tax classification that allows active traders to treat their trading activity as a business. Unlike investors, who report income as capital gains or losses, traders with TTS can report trading activity on Schedule C, enabling them to deduct ordinary and necessary business expenses.
To qualify for TTS, you must meet the following requirements:
Achieving TTS can offer several tax advantages:
There is no formal IRS application for TTS, but your trading activity must meet the criteria outlined above. To elect MTM accounting, file Form 3115, "Application for Change in Accounting Method," by the due date of your tax return for the prior year.
While TTS offers substantial benefits, it is not without challenges:
Trader tax status is a designation that allows individuals who engage in trading stocks, bonds, and other securities to be treated as traders rather than investors for tax purposes. This status can provide significant tax benefits, as it enables traders to deduct trading-related expenses and allows them to treat gains and losses more favorably. To qualify for trader tax status, a person must demonstrate that they are trading as a business with regularity and continuity. This usually involves frequent buying and selling of securities with the intention of making a profit. The IRS looks at factors such as the frequency of trades, the holding period for securities, and the amount of time devoted to trading activities. Achieving this status can lead to more advantageous tax treatment, including the possibility of marking gains and losses to market at year-end.
To qualify for trader tax status, an individual must engage in trading activities with continuity and regularity, primarily for the purpose of profit. Additionally, the trading must be substantial enough to demonstrate a business-like approach rather than a casual investment strategy.
Obtaining trader tax status allows you to deduct trading-related expenses and potentially benefit from lower tax rates on capital gains. This status can also provide added advantages when reporting losses, enabling greater tax planning opportunities.
To qualify for trader tax status, an individual must engage in substantial trading activities with the intent to profit from short-term market movements, demonstrating a consistent and regular trading pattern. Additionally, the trading must be significant enough to be considered a trade or business rather than a hobby.
Having trader tax status allows individuals to treat their trading activities as a business, which can lead to significant tax benefits such as the ability to deduct trading-related expenses and potentially qualify for favorable capital gains treatment. This designation can also facilitate the ability to use mark-to-market accounting, which can simplify tax reporting for active traders.
