Day traders—or, people who generate a substantial income from trading securities, like stocks, bonds, and options—may find it beneficial to obtain an IRS designation known as Trader Tax Status (TTS). Filing with TTS allows traders to make a number of tax deductions, which is a major financial incentive. But not every person who plays stocks qualifies for TTS—and not every person who qualifies one year will qualify the next. Here’s what you need to know about Trader Tax Status:
What are the benefits of Trader Tax Status?
The main benefit of Trader Tax Status comes in the form of tax deductions, which other traders (even if they make a significant sum from securities) wouldn’t qualify for without TTS. Such tax deductions can include educational expenses, home office expenses, and the ability to deduct interest as an expense.
How do I qualify for TTS?
The IRS specifies three main characteristics for TTS qualification:
- Seek to profit from trades
- Trade frequently
- Trade at a great volume
Since TTS status essentially means the IRS is treating the activities of a day trader like a business, that trader has to actually operate like a business. This means working almost every market day for several hours a day, in addition to performing administrative tasks. It’s a good idea to check-in with a CPA to see whether your trade business qualifies for trader tax status.
How do I file for Trader Tax Status?
TTS requires approval from the IRS. To qualify, you’ll have to alert the IRS of your intention to file under TTS by making a mark-to-market election in your tax return for the year PRIOR to the year you’ll actually receive TTS. To make this election, the IRS requires that you attach a statement to your tax return that includes:
- The declaration that you’re making an election under section 475(f)
- The first tax year the election will be effective
- The type of trade or business you’re making the election for
If you’re seriously considering Trader Tax Status, you’ll probably want to reach out to a CPA or business attorney to see if your business qualifies for TTS.