How to Qualify for Trader Tax Status (2024)

How to Qualify for Trader Tax Status (1)

You’ve been day trading for a while, and you’ve been pretty successful at it. You’re thinking about taking the plunge and going full-time. But there’s one thing holding you back: taxes. More specifically, you’re worried about how to pay fewer taxes as a day trader. So, you ask how to qualify for trader tax status (TTS).

What is Trader Tax Status (TTS)?

Trader tax status is a designation given to taxpayers who meet certain criteria set forth by the IRS. TTS comes with a number of benefits, chief among them being the ability to deduct business expenses from your taxes. This includes computer equipment, office space, education, and travel.

How to Qualify for Trader Tax Status

Now that we know what TTS is and its benefits, let’s talk about how to qualify.

To qualify for TTS, you must meet a set of criteria that is based onIRS Tax Topic 429:

  1. You must derive a majority of your income from trading.
  2. You must be considered a “trader in securities” by the IRS.

The first criterion is relatively straightforward.If more than 50% of your income comes from trading, you should have no problem meeting that criteria. The second criterion is a bit more complicated and is where most people run into trouble.

How to Qualify as a Trader in Securities

To be considered a “trader in securities” by the IRS, you must meet the following criteria:

  1. You must have business expenses customary to an active day trader. If you are executing your trading business, you will incur many expenses just in the ordinary course of business. And these are reasonable and necessary to execute. For example, if you’re a short seller, you may have a hard-to-borrow interest or locate fees. If you have a brokerage account, you might pay for data feeds. You might subscribe to a newswire service like Benzinga Pro or scanners like TradeIdeas. These are all expenses customary to an active day trader.
  2. You must have equipment used for day trading. Day trading equipment needs to be equipment used in the execution of your trading and could include items such as:
    • Computer with multiple monitors
    • Laptop
    • High-speed internet connection
    • Day trading software platform
  3. You must spend enough time in the market as a trader. This means that trading cannot simply be a hobby; it must be your primary source of income. Regarding how much of your income needs to come from trading, the IRS has said that traders should expect tospend at least 500 hours trading per year tradingon qualifying for TTS.
  4. You must trade actively. You cannot simply buy and hold a stock for years; you must be an active trader, constantly buying and selling securities. The IRS has never provided explicit guidance on these questions, but they have offered some general guidelines. For example, a good benchmark isplacing at least 720 trades during a tax year. A trade is defined as a buy or a sell. Active day traders can meet this criterion quickly.
  5. You must trade frequently and regularly. To qualify for TTS, you must trade frequently. This is, by far, the most challenging criterion to hit. But what does “frequently” mean, exactly? The stock market is open 252 days per year. The IRS states that you must actively trade in at least 189 days of the 252 days. This gives you 75 days you can afford to miss for vacation, sick time, or any other personal time off.

TraderFyles Can Help

TraderFyles has a built-in metric to determine how many trades you placed and how many days you traded, the two most difficult criteria to meet, in the tax year. All you have to do is upload your 1099-B into our 1099-B Match or upload your trade history into Audit My Broker and let the software do the rest. Sign up today and start taking advantage of trader tax status!

How to Qualify for Trader Tax Status (2)
How to Qualify for Trader Tax Status (3)

Bottom Line

Qualifying for trader tax status can save you a lot of money come tax time—but it’s not easy. You need to meet these five criteria to qualify for trader tax status. If you can check all of those boxes, then congratulations—you are well on your way to reaping the many benefits that come with TTS!

Of course, these are just general guidelines—the IRS could audit your taxes and determine that you don’t meet the requirements for TTS even if you think you do. So it’s always best to consult with a tax professional before attempting to claim TTS on your taxes.

Here is an excellent video from Brian Rivera, CPA, discussing how to qualify for trader tax status. Check it out.

Recent Posts

Have More Than 10,000 Transactions on TurboTax? Here’s The Fix

As an active trader, dealing with taxes can be a challenging task, especially when you have a high volume of transactions. Traditional tax software like

Read post

Navigating Form 8949: A Guide for Tax Professionals

Navigating Form 8949: A Comprehensive Guide for Tax Professionals Every tax season brings with it a unique set of challenges for tax professionals, and one

Read post

Preparing Taxes for Active Day Traders: A Comprehensive Guide

Active day traders play an essential role in the market’s dynamism, carrying out frequent trades that respond to short-term price movements. This daily financial juggling

Read post

How to Qualify for Trader Tax Status (2024)


How to Qualify for Trader Tax Status? ›

You must seek to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation; Your activity must be substantial; and. You must carry on the activity with continuity and regularity.

How to qualify as a trader for tax purposes? ›

You must seek to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation; Your activity must be substantial; and. You must carry on the activity with continuity and regularity.

How to prove income as a day trader? ›

Some ways to prove self-employment income include:
  1. Annual Tax Return (Form 1040) This is the most credible and straightforward way to demonstrate your income over the last year since it's an official legal document recognized by the IRS. ...
  2. 1099 Forms. ...
  3. Bank Statements. ...
  4. Profit/Loss Statements. ...
  5. Self-Employed Pay Stubs.

How do you qualify as a professional day trader? ›

How to become a day trader
  1. Open a brokerage account. ...
  2. Ensure your account meets the equity requirement. ...
  3. Conduct at least four trades within five days. ...
  4. Verify that your day trades make up over 6% of your total trades. ...
  5. Consider joining a day trading firm.
Feb 3, 2023

How to be classified as a professional trader? ›

Professional experience: You must have worked in the financial sector in a professional position (which requires knowledge of CFDs or spread betting) for at least one year.

Is trader tax status worth it? ›

Tax Advantages of Trader Status

Potential upsides of qualifying for trader status for tax purposes include: Traders can deduct expenses on Schedule C and benefit from SE tax exemption. They're considered to be in the business of buying and selling stocks (and other securities, if applicable) for a profit.

How many trades do you need to be a day trader for taxes? ›

We recommend an average of four transactions per day, four days per week, 16 trades per week, 60 a month, and 720 per year on an annualized basis.

How much money do day traders with $10,000 accounts make per day on average? ›

With a $10,000 account, a good day might bring in a five percent gain, which is $500. However, day traders also need to consider fixed costs such as commissions charged by brokers. These commissions can eat into profits, and day traders need to earn enough to overcome these fees [2].

Can a day trader write off a car? ›

While it's an exciting aspiration, when it comes to tax deductions, your flashy new car won't make the cut. Even if you use it to drive to a trading seminar or meeting, the Internal Revenue Service doesn't view this as a necessary expense for your day trading business.

How to show proof of income without pay stubs? ›

Here are options for showing proof:
  1. Employment verification letter. ...
  2. Signed offer letter. ...
  3. W-2s, 1099s, and tax returns. ...
  4. Official statement/letter from a CPA or trust manager. ...
  5. Bank statements. ...
  6. College financial aid documents. ...
  7. Guarantor.

What is the 3-5-7 rule in trading? ›

The strategy is very simple: count how many days, hours, or bars a run-up or a sell-off has transpired. Then on the third, fifth, or seventh bar, look for a bounce in the opposite direction. Too easy? Perhaps, but it's uncanny how often it happens.

How to avoid PDT rule? ›

Switch to a cash account.

A cash account isn't subject to PDT regulation. This will allow you to continue day trading and participating in the Stock Lending and Brokerage cash sweep programs.

Do day traders pay social security tax? ›

Your income from short term capital gains isn't subject to Social Security tax. It is “unearned income”. The income is still subject to income tax. You'll need to make estimated tax payments for federal tax purposes on April 15, June 15, September 15, and January 15.

What is the difference between a trader and a professional trader? ›

First, professional traders typically have more experience in the markets. They've been trading for longer and have learned from their mistakes. Second, professional traders typically have more capital to work with. This allows them to make larger trades and potentially earn higher profits.

Who is considered a trader? ›

A trader is an individual who engages in the buying and selling of assets in any financial market, either for themself or on behalf of another person or institution. The main difference between a trader and an investor is the duration for which the person holds the asset.

What defines a pro trader? ›

What is a professional trader? A professional trader is a person who works in finance and engaged in investing as a business or in a full-time role rather than occasionally or as a hobby. They may work for themselves, at a trading company, at a wealth management firm or as a freelance trader for individual clients.

Do you need a license to be a funded trader? ›

Whether you need a license or certification to be a virtually funded prop trader varies based on the specific firm. You do not need a license or certificate to trade with SurgeTrader. This is the case with many virtual trading prop firms.

Should day traders use an LLC? ›

One of the most popular options for day traders is the limited liability company, or LLC model. While there are some minor drawbacks, including some negligible LLC annual fees, this is ultimately a highly beneficial approach for anyone interested in trading stocks for their vocation.

What is a qualified trader business? ›

(3) Qualified trade or business For purposes of this subsection, the term “qualified trade or business” means any trade or business other than— (A) any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, ...


Top Articles
Latest Posts
Article information

Author: Sen. Ignacio Ratke

Last Updated:

Views: 5297

Rating: 4.6 / 5 (76 voted)

Reviews: 83% of readers found this page helpful

Author information

Name: Sen. Ignacio Ratke

Birthday: 1999-05-27

Address: Apt. 171 8116 Bailey Via, Roberthaven, GA 58289

Phone: +2585395768220

Job: Lead Liaison

Hobby: Lockpicking, LARPing, Lego building, Lapidary, Macrame, Book restoration, Bodybuilding

Introduction: My name is Sen. Ignacio Ratke, I am a adventurous, zealous, outstanding, agreeable, precious, excited, gifted person who loves writing and wants to share my knowledge and understanding with you.