Active traders who regularly buy and sell securities can potentially save money on taxes by qualifying for trader tax status (TTS). TTS allows traders to treat their trading income and expenses as a business, providing unique tax treatments and deductions.
Trader tax status is not an election, but a designation granted by the IRS to traders who meet specific criteria. To qualify, traders must trade substantially, regularly, frequently, and continuously throughout the year and seek to profit from short-term price swings. Traders must also have a dedicated workspace and a written trading plan.
The benefits of trader tax status are significant. Traders can deduct trading-related expenses, elect Section 475 mark-to-market accounting, and qualify for the 20% qualified business income deduction. Traders can also set up a retirement plan and make tax-deductible contributions.
To claim trader tax status, traders must file their trading expenses on Schedule C or a pass-through entity tax return. Traders who wish to elect Section 475 mark-to-market accounting must do so by April 15th. If traders plan to set up a retirement plan, they must do so by December 31st.
Trader tax status is not automatic and can be challenging to obtain. Traders must keep accurate records and seek professional advice from a CPA or tax attorney before claiming TTS on their tax return.
In conclusion, active traders who meet the criteria for trader tax status can benefit from unique tax treatments and deductions. While obtaining trader tax status is not easy, it can result in significant tax savings. Traders should seek professional advice and keep accurate records to claim trader tax status correctly.
