Alert

Cardano, the sixth largest crypto asset by market cap, is now available to trade on tastyworks. Here’s what you should know.
tastytrade

Trade Tax Questions

Mar 14, 2016

By: M. Slabinski

It’s tax season. And there are some particular IRS rules regarding taxes and trading. We’re not tax accountants, but we want you to make smart choices about your taxes just like you make smart choices about your trades. This article will help you ask your accountant the right questions to make the process easier. 

Are you an INVESTOR or a TRADER in the eyes of the IRS?

This is an important distinction because of how losses and other expenses can be deducted from your ordinary income. Typically, investors are limited to the losses they can take in a year and can’t deduct trading expenses. Traders have fewer limits on deducting losses and trading expenses. But the IRS considers you a trader according to strict rules. Just calling yourself a trader or being “active” isn’t enough. IRS Topic 429, https://www.irs.gov/taxtopics/tc429.html covers Investor or Traders status. 

o Investor - IRS Definition: 

  • Buys & sells securities (including options) expecting income 
  • Trades for personal investment and not conducting a business
  • Holds these securities for a substantial period of time

o Trader (“Business”) – IRS Definition:  

  • You must meet ALL of the following to qualify as a trader
  • Seek profit from daily market movements and NOT from dividends, interest, or capital appreciation
  • Activity must be “substantial”
  • Activity must be carried on with continuity & regularity
  • Furthermore, you should consider:

o Holding period of your positions

o Frequency & dollar amount of your trades

o Expectation of making a living off of your trading

o Amount of time you spend trading

So, just because you’re a tastytrader, selling options and spreads and buying them back on a regular basis, the IRS doesn’t necessarily consider you a trader for tax purposes. The IRS says, “If the nature of your trading activities does not qualify as a business, you are considered an investor and not a trader. It does not matter whether you call yourself a trader or a day trader, you are an investor.”

The real question is, then, does your trading qualify as a business? Unfortunately, the IRS doesn’t give you any parameters to make that decision. There are no set dollar amounts. No minimum number of trades. But from our experience, here are some thoughts to guide you:

  • Holding period of your trades – If you are trading options the tastytrade way, your holding periods are most likely less than 60 days. Those are considered short–term. That would help classify you as a trader, but don’t rely on the holding criteria alone.
  • Frequency & dollar amount of your trades – This matters a lot.  Someone making a few trades per month is probably going to be considered an investor by the IRS. So you would need to probably be doing several more than a few trades per day to be considered a trader.
  • Intention & expectation of making a living from trading – Be able to demonstrate that you’ve set up a business. For example, you’ve invested in technology, computer equipment or faster connectivity or Internet capacity to operate a daily trading business. In addition, you should be making your own trading decisions and not relying on advisors or money managers.
  • Amount of time you spend trading – Are you spending more than half of your day trading or do you have another job? If this is something you are doing occasionally or on your lunch break or in between unrelated meetings, you’re probably not going to qualify as a trader.

If you think you might qualify for trading status, here are some of the reporting requirements around calling it a business.

  • Form 1040, Schedule C = Profit or Loss From Business
    This is where a trader would record trading expenses instead of a Schedule A used by an investor. You may also decide to create an entity like an S-Corporation Form 1120S, for example, and report expenses differently. However, keep in mind that creating a separate company can also be an added expense and maintenance that if you are not a true business for the long-term may just be an added expense. An S-Corp isn’t for everybody.
  • Traders can elect mark-to-market treatment, but investors can’t. A 475(f) election is when you choose to mark-to-market open positions at the end of the calendar year.
  • WITHOUT a 475(f) election, you file Form 1040, Schedule D & Form 8949. You must treat trading gains & losses as capital gains & losses and the capital loss limitations and wash sales still apply. So, if you don’t make the election, it appears the only benefit of being a trader is that you basically get to take your other business expenses on Schedule C in “full” instead of being limited on Schedule A.
  • WITH a timely 475(f) election, you file Form 1040, Schedule D & Form 4797. You can treat the trading gains & losses as ordinary income, and capital loss limitations and wash sales do NOT apply.  But use caution, because if you trade 1256 contracts (futures, options on futures & broad based index options, for example) and if you don’t separate those as investments, you will lose the advantageous 60/40 tax rates that apply for investors on those products, because it will all be considered ordinary income.

If you don’t qualify as a trader, these are the reporting requirements.

o Investor Forms & Items to Note:

  • Form 1040, Schedule D = Capital Gains & Losses 
  • Form 8949 = Sales & Other Dispositions of Capital Assets
  • Form 1040, Schedule A = Itemized Deductions (which would include expenses like advice, legal, accounting, investment newsletters, etc. & may be limited under your itemized deductions)
  • Capital loss limitations apply
  • Wash sales apply

The bottom line is that it’s not easy to be considered a trader in the eyes of the IRS. Even if you are, there are benefits and pitfalls. Discuss these with your tax professional. But hey, no matter what the IRS calls you or how you’re taxed, you’ll always be a tastytrader!

Read more about trader tax questions here and watch our shows on tastytrade.com. Stay tasty, my friends!


Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Related Posts

tastytrade content is provided solely by tastytrade, Inc. (“tastytrade”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure for Futures and Options found on tastyworks.com.

tastyworks, Inc. ("tastyworks") is a registered broker-dealer and member of FINRA, NFA and SIPC. tastyworks offers self-directed brokerage accounts to its customers. tastyworks does not give financial or trading advice nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastyworks’ systems, services or products. tastyworks is a wholly owned subsidiary of tastytrade, Inc (“tastytrade”). tastytrade is a trademark/servicemark owned by tastytrade.

Quiet Foundation, Inc. (“Quiet Foundation”) is a wholly-owned subsidiary of tastytrade The information on quietfoundation.com is intended for U.S. residents only. All investing involves the risk of loss. Past performance is not a guarantee of future results. Quiet Foundation does not make suitability determinations, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of Quiet Foundation’s systems, services or products.

Small Exchange, Inc. is a Designated Contract Market registered with the U.S. Commodity Futures Trading Commission. The information on this site should be considered general information and not in any case as a recommendation or advice concerning investment decisions. The reader itself is responsible for the risks associated with an investment decision based on the information stated in this material in light of his or her specific circumstances. The information on this website is for informational purposes only, and does not contend to address the financial objectives, situation, or specific needs of any individual investor. Trading in derivatives and other financial instruments involves risk, please read the Risk Disclosure Statement for Futures and Options. tastytrade is an investor in Small Exchange, Inc.

© copyright 2013 – 2021 tastytrade. All Rights Reserved. Applicable portions of the Terms of use on tastytrade.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastytrade’s podcasts as necessary to view for personal use.