Topic 10 · 6 min read

Turning Trading Activity Into a Business

Trader status changes the rules — if you truly qualify.

Most people who buy and sell securities are investors for tax purposes. A small group who trade frequently, substantially, and continuously can qualify as traders, which converts trading costs into business expenses and opens an election that removes the capital-loss limit.

What to know

Investor versus trader

Investors seek dividends and appreciation. Traders seek to profit from daily price swings, with frequent trades nearly every market day.

What the facts must show

High volume, short holding periods, substantial time devoted, and continuity across the year. There is no bright-line test.

Business expense deductions

Traders deduct data feeds, platforms, home office, and education as business expenses, which investors generally cannot.

The mark-to-market election

Electing Section 475 treats positions as sold at year end, makes gains and losses ordinary, and removes both the $3,000 loss cap and the wash-sale rule.

Timing of the election

The election must generally be made by the original due date of the prior year's return — it cannot be added after a bad year.

Watch out for

• Mark-to-market gives up long-term capital gain rates permanently unless revoked.
• Trader status does not eliminate self-employment considerations on related activities.
• Weak facts claimed as trader status are a frequent audit loss.