Trader Tax Status (TTS)
A facts-and-circumstances determination that a person trades securities as a business rather than as an investor, unlocking business expense deductions and eligibility for the Section 475(f) mark-to-market election.
Detailed Explanation
Trader Tax Status is not something you elect; it is a determination, based on facts and circumstances, that your trading rises to the level of a trade or business under the standard of Commissioner v. Groetzinger. The IRS, in Topic No. 429, requires that you seek to profit from daily market movements (not dividends, interest, or long-term appreciation), that the activity be substantial, and that you carry it on with continuity and regularity. Courts weigh the holding period, the frequency and dollar volume of trades, the time devoted, and whether you pursue it for a livelihood. There is no bright-line test; practitioners cite rough benchmarks (a high trade count, trading on a large share of market days, short average holding periods, near-full-time hours) drawn from cases such as Endicott v. Commissioner, but these are guidelines, not law, and part-time traders with full-time jobs frequently lose. A qualifying trader who makes no further election still reports gains and losses as capital on Form 8949 and Schedule D, remains subject to the wash-sale rules and the $3,000 capital-loss limit, but may deduct trading-business expenses (data feeds, software, home office, margin interest) on Schedule C, which matters more than ever because the 2017 Tax Cuts and Jobs Act suspended investor deduction of those same expenses through 2025. Trading gains are not self-employment income, so a trader cannot use them to fund a retirement plan or generate a QBI deduction. TTS is the prerequisite for the Section 475(f) mark-to-market election.
Key Points
- TTS is a facts-and-circumstances determination, not an election; Section 475(f) is the election it unlocks.
- IRS Topic 429: seek profit from daily swings, activity must be substantial, pursued with continuity and regularity.
- No bright-line test; practitioner benchmarks (high trade count, most market days, short holding periods, near-full-time) are guidelines, not law.
- Without a 475 election, a trader still has capital gains, wash sales, and the $3,000 loss cap, but deducts business expenses on Schedule C.
- Trading gains are not self-employment income, so they cannot fund a retirement plan or create QBI.
Practical Example
A full-time trader makes about 1,500 trades across 220 market days with an average holding period under a week, and treats it as a business with a dedicated office and data subscriptions. She likely qualifies for TTS and deducts her platform and home-office costs on Schedule C. A part-time engineer who makes 300 trades on 60 days, by contrast, looks like the taxpayer denied status in Endicott.
Related TS CPA Service
Year-round, proactive tax planning that puts more money back in your pocket, not the IRS's.
Learn about Tax Planning & StrategyRelated Terms
Section 475(f) Mark-to-Market Election (Traders)
An election available to qualifying securities traders to treat open positions as sold at year-end fair market value, converting gains and losses to ordinary income, exempting them from wash-sale rules, and removing the $3,000 capital-loss limit.
Section 1256 Contracts (60/40 Rule)
Regulated futures, broad-based index options, and certain other contracts that are marked to market by statute each year and taxed 60% long-term and 40% short-term regardless of holding period.
Wash Sale Rule
An IRS rule disallowing the recognition of a capital loss when substantially identical securities are repurchased within 30 days before or after the loss-generating sale.
Capital Gain
The profit realized from the sale of a capital asset such as stock, real estate, or cryptocurrency, taxed at preferential rates if held longer than one year.
Self-Employment Tax
The Social Security and Medicare tax (15.3% combined) paid by self-employed taxpayers on their net earnings from self-employment.
Have a Question About Trader Tax Status (TTS)?
Get a free, no-obligation answer from a licensed CPA. We respond the same day.
Free Consultation