Trader Tax Status

The trader tax status allows you a number of benefits over investors. However it in order to qualify for it you must meet certain conditions.

In order to qualify for the trader tax status there are three conditions that should be meet.

1. You must profit from the daily price movements of the market.

2. You must trade every day or almost every day.

3. You must be somewhat profitable.

In addition to that the IRS may decide to challenge you if

1. You have other sources of income like a job, or another business.

2. You are considered a part time trader.

3. You are not consistently losing money year after year.

If you do qualify however there are many benefits that come with filing your taxes as a trader.

The first and the biggest is the ability to Wright off your business expenses. These expenses include stock market losses, any seminars or educational programs you attended to improve your trading abilities, and interest from margin. In addition to the extra Wright offs you can use these Wright offs to offset any taxable income, not just trading income.

If you lost money one year you also get the ability to claim Net Operating Loss (NOL) which can be carried back two years or forwarded to help offset income.

The last big advantage for filing your taxes as a trader is that you can open up a market-to-market account (MTM) . Most investors and traders hold a cash account. With cash accounts any trader all losses and gains are considered capital gains, or capital losses. Currently if you have a bad year and accumulate a net capital loss of over $3,000 you can’t deduct the entire loss that year. With a MTM account however, all capital gains and losses and turned into normal gains and losses. This has no limit to how much loss you can Wright off for the year.

The second advantage of the MTM account is that the wash rule no longer applies. Normally this law prevents you from filing capital loss on a stock if you sell it for a loss and buy it back within 30 days. But you only have until April 15th of the current tax year to elect a MTM account.

If you want to learn more about the trader tax status check out the book The Tax Guide for Traders