Tax Extensions: 12 Tips To Save You Money

March 14, 2023 | By: Robert A. Green, CPA | Read it on

Individual tax returns for 2022 are due April 18, 2023. However, most active traders aren’t ready to file on time. Some brokers issue corrected 1099Bs right up to the deadline. Many partnerships and S-Corps file extensions by March 15, 2023, and don’t issue Schedule K-1s to partners until after April 18. Many securities traders struggle with accounting for wash sale loss adjustments.

The good news is that traders don’t have to rush the completion of their tax returns by April 18. They should take advantage of a simple one-page automatic extension with payment of taxes owed to the IRS and state. Most active traders file extensions, and it’s helpful to them on many fronts.

You might not have to file an extension if you are eligible for disaster tax relief. However, if you want to elect Section 475 MTM accounting for 2023, then consider filing an extension and attaching the election to that extension. (See Tax Relief In Disaster Situations.)

Tip 1: Get a six-month extension of time
By April 18, 2023, request an automatic six-month extension to file individual federal and state income tax returns due October 16, 2023. Form 4868 instructions indicate how easy it is to get this automatic extension, and the IRS doesn’t require a reason. It’s an extension to file a complete tax return, not an extension to pay taxes owed. Estimate and report what you think you owe for 2022 based on your tax information received.

Tip 2: Avoid penalties from the IRS and state for being late
Learn how IRS late-filing and late-payment penalties apply so you can avoid or reduce them to your satisfaction. 2022 Form 4868 (Application for Automatic Extension of Time To File U.S. Individual Income Tax Return) page two states:

The late payment penalty is usually 1⁄2 of 1% of any tax (other than estimated tax) not paid by the regular due date of your return, which is April 18, 2023. It’s charged for each month or part of a month the tax is unpaid. The maximum penalty is 25%.

The late payment penalty won’t be charged if you can show reasonable cause for not paying on time. Attach a statement to your return fully explaining the reason. Don’t attach the statement to Form 4868. You’re considered to have reasonable cause for the period covered by this automatic extension if both of the following requirements have been met. At least 90% of the total tax on your 2022 return is paid on or before the regular due date of your return through withholding, estimated tax payments, or payments made with Form 4868. The remaining balance is paid with your return.

A late filing penalty is usually charged if your return is filed after the due date (including extensions). The penalty is usually 5% of the amount due for each month or part of a month your return is late. The maximum penalty is 25%. If your return is more than 60 days late, the minimum penalty is $450 (adjusted for inflation) or the balance of the tax due on your return, whichever is smaller. You might not owe the penalty if you have a reasonable explanation for filing late. Attach a statement to your return fully explaining your reason for filing late. Don’t attach the statement to Form 4868.”

Check these types of penalties with your state, too. 

Tip 3: File an automatic extension even if you cannot pay
Even if you can’t pay what you estimate you owe, file the automatic extension form on time by April 18, 2023. It should help avoid the late-filing penalty, which is ten times more than the late-payment penalty. If you can’t pay in full, you should file your tax return or extension and pay as much as possible.

An example of late payment and late-filing penalties: Assume your 2022 tax liability estimate is $50,000. Suppose you file an extension by April 18, 2023, but cannot pay any of your tax balance due. You file your 2022 tax return on the extended due date of October 16, 2023, with full payment. A late-payment penalty applies because you did not pay 90% of your tax liability on April 18, 2023. The late-payment penalty is $1,500 (six months late x 0.5% per month x $50,000). Some traders view a late-payment penalty as a 6% margin loan, but it’s not tax-deductible.

By simply filing the extension on time in the above example, you avoided a late-filing penalty of $11,250 (six months late x 5% per month [25% maximum], less late-payment penalty factor of 2.5% = 22.5%; 22.5% x $50,000 = $11,250). The IRS also charges Interest on taxes paid after April 18, 2023.

If you don’t expect to owe 2022 taxes by April 18, 2023, it’s easy to prepare an extension with no balance due. Make sure to file it on time to avoid a minimum penalty if you were wrong and owe taxes for 2022.

Tip 4: Add a payment cushion for the first quarter (Q1) 2023 estimated taxes due
Traders with 2023 year-to-date trading gains and significant tax liability in the past year should consider making quarterly estimated tax payments in 2023 to avoid underestimated tax penalties. The IRS increased interest rates in 2022 and 2023, and current rates are 7% for underpayments. (See Interest rates increase for the first quarter of 2023.)

I recommend the following strategy for traders and business owners: Overpay your 2022 tax extension on April 18, 2023, and plan to apply an overpayment credit toward Q1 2023 estimated taxes. Most traders don’t make estimated tax payments until Q3 or Q4, when they have more precise trading results. Why pay estimated taxes for Q1 and Q2 if you incur substantial trading losses later in the year?

It’s better to pay an extra amount for the extension to set yourself up for three good choices: A cushion on 2022 if you underestimated your taxes, an overpayment credit toward 2023 taxes, or a tax refund for 2022 if no 2023 estimated taxes are due.

Tip 5: Consider a 2023 Section 475 MTM election
Traders eligible for trader tax status should consider attaching a 2023 Section 475 election statement to their 2022 federal tax return or extension due by April 18, 2023, for individuals and corporations and March 15, 2023, for partnerships and S-Corps.

Section 475 turns capital gains and losses into ordinary gains and losses, thereby avoiding the capital-loss limitation and wash-sale loss adjustments on securities (i.e., tax-loss insurance). Section 475 gains are eligible for the 20% qualified business income (QBI) deduction. (See How Traders Elect 475 To Maximize Their Tax Savings.)

Tip 6: File tax returns when it’s more convenient for you
Sophisticated and wealthy taxpayers know the “real” tax deadline is October 16, 2023, for individuals and September 15, 2023, for pass-through entities, including partnership and S-Corp tax returns. Pass-through entities file tax extensions by March 15, 2023.

Like most wealthy taxpayers, you don’t have to wait until the last few days of the extension period. Try to file your tax return in the summer months.

Tip 7: Be conservative with tax payments
I’ve always advised clients to be aggressive but legal with tax-return filings and look conservative with cash (tax money). Impress the IRS with your patience on overpayment credits and demonstrate you’re not hungry and perhaps overly aggressive to generate tax refunds. It’s wise for traders to apply overpayment credits toward estimated taxes owed on current-year trading income. You want to look like you will be successful in the current tax year.

The additional time helps build tax positions like qualification for trader tax status in 2022 and 2023. It may open opportunities for new ideas on tax savings. A rushed return does not.

Tip 8: Get more time to fund qualified retirement plans
The extension also pushes back the deadline for paying money into qualified retirement plans, including a Solo 401(k), SEP IRA, and defined benefit plan. The deadline for 2023 IRA contributions is April 18, 2023.

Tip 9: Respect the policies of your accountants
Your accountant can prepare extension forms quickly for a nominal additional cost related to that job. There are no fees from the IRS or state for filing extensions. Be sure to give your accountant the tax information received and estimates for missing data.

Your accountant begins your tax compliance (preparation) engagement, and they cut it off when seeing a solid draft to use for extension filing purposes. Your accountant will wait for the final tax information to arrive after April 18, 2023. Think of the extension as a half-time break. It’s not procrastination; accountants want tax returns finished.

Please don’t overwhelm your tax preparer the last few weeks and days before April 18 with minor details in a rush to file a complete tax return. Accounting firms with high-quality standards have internal deadlines for receiving tax information for completing tax returns. It’s unwise to pressure your accountant, which could lead to mistakes or oversights in a rush to file a complete return at the last minute. That doesn’t serve anyone well.

Tip 10: Securities traders should focus on trade accounting
It doesn’t matter if your capital loss is $50,000 or $75,000 at extension time: Either way, you’ll be reporting a capital loss limitation of $3,000 against other income. In this case, don’t get bogged down with trade accounting and reconciliation with Form 1099Bs until after April 18. The capital loss carryover impacts your decision to elect Section 475 MTM for 2023 by April 18, 2023, but an estimate is sufficient.

Consider wash-sale loss rules on securities: If these adjustments don’t change your $3,000 capital loss limitation, you can proceed with your extension filing. But if you suspect wash-sale loss adjustments could lead to reporting capital gains rather than losses, or if you aren’t sure of your capital gains amount, focus your efforts on trade accounting before April 18. (Consider TradeLog or GNM’s trade accounting service.) Try to do accounting work for year-to-date 2023; it also affects your decision-making on the 475 election.

Section 1256 contract traders can rely on the one-page 1099B showing aggregate profit or loss. Forex traders can depend on the broker’s online tax reports. Wash sales don’t apply to Section 1256 contracts and forex. Cryptocurrency traders should use crypto trade accounting programs to generate Form 8949.

Tip 11: Don’t overlook state extensions and PTE payments
Some states don’t require an automatic extension for overpaid personal tax returns; they accept the federal extension. You must file a state extension with payment if you owe state taxes. States tend to be less accommodating than the IRS in abating penalties, so covering your state taxes first is usually wise if you’re short on cash. Check the extension rules in your state.

For partnerships and S-Corps, don’t overlook pass-through entity (PTE) payments with the Form 7004 extension filing to benefit from the state’s SALT cap workaround solution enacted in about 29 states. (See Tax Tips For Traders Preparing 2022 Tax Returns.)

Tip 12: U.S. residents abroad should learn the particular rules
U.S. citizens or aliens residing overseas are allowed an automatic two-month extension until June 15, 2023, to file their tax return and pay any amount due without requesting an extension. (See Form 4868, page 2, “Taxpayers who are out of the country” and the IRS website.)

Darren Neuschwander, CPA, contributed to this blog post. 



Tax Relief In Disaster Situations

March 13, 2023 | By: Robert A. Green, CPA | Read it on

There have been many federal disaster situations around the U.S. these past years. See if you qualify to pay taxes and file tax returns after the original deadline.

See Tax Relief in Disaster Situations. For example IRS: May 15 tax deadline extended to Oct. 16 for disaster area taxpayers in California, Alabama and Georgia.

Check with your state(s) to see if they follow the IRS disaster relief —for example, More Time to File State Taxes for Californians Impacted by December and January Winter Storms.

Here’s content from Darren Neuschwander, CPA, Managing Member of Green, Neuschwander & Manning, LLC.

March 9, 2023: Due to the California storms, the IRS and CA Franchise Tax Board (FTB) released numerous press releases relating to the automatic filing extension. In plain English, this email is meant to clarify the extended deadlines as they stand now.

Affected taxpayers

Any taxpayer who resides in, or whose principal place of business is located in, any affected California county is granted an automatic extension of time to file and pay most federal and California tax obligations until October 16, 2023. These taxpayers do not have to be directly affected by the storms.

All counties in California are listed as affected counties except:

  • Imperial;
  • Kern;
  • Lassen;
  • Modoc;
  • Plumas;
  • Shasta; and
  • Sierra.

The extension deadline applies for federal and state tax filing/payment extension purposes if a county is listed in either IRS announcement (CA-2023-01 or CA-2023-02).


The automatic extension applies to the filing due dates for any of the following types of returns that have a due date (original or extended due date) on or after January 8, 2023, through October 16, 2023:

  • Individual income tax returns;
    •    Corporate income tax returns;
    •    Partnership income tax returns;
    •    Estate and trust income tax returns;
    •    Estate tax returns;
    •    Gift and generation-skipping transfer tax returns;
    •    Annual information returns of tax-exempt organizations;
    •    Payroll tax returns;
    •    Excise tax returns; and
    •    Employee benefit plan returns (Form 5500 series).


The automatic extension applies to any payments for the listed return types for payments due on or after January 8, 2023, through October 16, 2023, except for payroll tax deposits. The payment extension for payroll tax deposits only applied to deposits due from January 8, 2023, through January 23, 2023, and those deposits were due on January 23, 2023.

In other words, all payments for the above return types due on or after January 8, 2023, through October 16, 2023, are due on October 16, 2023, without incurring late payment penalties. This includes estimated tax payments and the California passthrough entity elective tax March 15, 2023, payment (for calendar-year taxpayers) as well as the June 15, 2023, prepayment for the 2023 tax year. Retirement plan contributions, including employer contributions, are extended to October 16, 2023.

Taxpayers can file their returns now and pay the tax later (although notices may still be sent).

The IRS press releases are available at:

California press releases are available at:

The FTB’s extension-related FAQs are available at:

A Section 475 MTM election for 2023
The above disaster relief might not apply to 2023 Section 475 MTM elections due on the original tax deadlines of 2022 tax returns. To play it safe, try to file the 2022 extension with the 2023 Section 475 election attached by April 18, 2023, for individuals and March 15, 2023, for partnerships and S-Corps.

Tax Tips For Traders Preparing 2022 Tax Returns

February 15, 2023 | By: Robert A. Green, CPA | Read it on

Trader tax status (TTS) is the ticket to tax savings. If you qualify, you can claim some tax breaks, such as business expenses, after the fact and elect and set up other tax breaks — like Section 475 MTM accounting (tax loss insurance) and health insurance and retirement plan deductions through an S-Corp— on a timely basis. 

TTS vs. Section 475 MTM accounting
If you qualified for TTS in 2022, you could claim business expenses on Schedule C. No IRS election was required. Don’t confuse that with a Section 475 MTM accounting election that a TTS trader could have submitted by April 18, 2022, for the tax year 2022.

The 475 election is like applying to graduate school, and TTS is like graduating from an undergraduate university; you need TTS to make and use a 475 election. It’s not too late to use TTS business expenses on your 2022 tax return, but it is too late to use Section 475 MTM to avoid wash sale losses if you missed the 475 election.

How to qualify for TTS

  • Volume: 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. Count each open and closing transaction separately, not round trip. Scaling in and out counts, too.
  • Frequency: Execute trades on nearly four weekly days, around a 75% frequency rate.
  • Holding period: The IRS said the average holding period must be 31 days or less. That’s a bright-line test.
  • Trades full-time or part-time for a good portion of the day; the markets are open almost daily. Part-time and money-losing traders face more IRS scrutiny, and individuals face more scrutiny than entity traders.
  • Hours: Spends more than four hours daily, almost every market day, working on their trading business — all-time counts.
  • Avoid sporadic lapses: A trader has few to no intermittent stoppages in the trading business during the year. Vacations are okay.
  • Intention: Has the intention to run a business and make a living. It doesn’t have to be your primary living.
  • Operations: Has significant business equipment, education, business services, and a home office.
  • Account size: Securities traders need to have $25,000 on deposit with a U.S.-based broker to achieve “pattern day trader” (PDT) status. For the minimum account size, we like to see more than $15,000.

Tax reporting for a sole proprietor trading business

Multiple tax forms
The IRS uses multiple tax forms for trading businesses eligible for TTS. It can be confusing to taxpayers, accountants, and the IRS. Traders enter gains and losses, portfolio income, and business expenses in various tax forms.

Which tax form or schedule should a forex trader use? It depends on their circumstances. Which form is correct for securities traders using the Section 475 MTM method? Can trading gains be reported directly on Schedule C? The different reporting strategies for the various types of traders make tax time more manageable.

Schedules C for expenses only
Most sole-proprietorship businesses report revenue, cost of goods sold, and expenses on Schedule C. The IRS can easily see if they are profitable; they cannot do so with sole proprietor traders.

TTS traders qualifying for TTS report only trading business expenses on Schedule C. Trading gains and losses are reported in other tax forms, depending on the situation. If possible, it’s helpful to include a tax return footnote tying the trader schedules together in your tax compliance software to show profitability. Entity tax returns do that.

Schedule D and Form 8949
Sales of securities for each trade (no summary reporting) are reported on Form 8949, which feeds into Schedule D (cash method) with net capital losses limited to $3,000 per year against ordinary income (the rest is a capital loss carryover). Capital losses are unlimited against capital gains.

See IRS instructions for Form 8949 and Form 8949 for 2022 taxes: “Note: You may aggregate all short-term transactions reported on Form(s) 1099-B showing basis was reported to the IRS and for which no adjustments or codes are required. Enter the totals directly on Schedule D, line 1a; you aren’t required to report these transactions on Form 8949 (see instructions).” Most traders have WS loss adjustments, so they must report each trade on Form 8949.

See Securities and Form 8949 & 1099-B Issues. Cost-basis reporting has complicated tax compliance, and traders use trade accounting software for help.

Schedule 4797 for MTM accounting
TTS traders who elected and used Section 475 MTM on securities report each securities trade on Form 4797 Part II. MTM means open securities trades are marked-to-market at year-end prices. Traders still report sales of segregated investments in securities (without MTM) on Form 8949 and Schedule D.

Form 4797 Part II receives ordinary gain or loss treatment avoiding the capital loss limitation and wash-sale loss rules. (It’s “tax loss insurance.”) Profitable traders also can benefit from Section 475 using the qualified business income (QBI) deduction.

Section 475 Election
Existing taxpayers file a Section 475 election statement by the due date of the prior year’s tax return or extension with the IRS and perfect it later with a Form 3115 (change in accounting method) filing by the tax return deadline, including extension. Learn about making a Section 481(a) adjustment to convert from the realization to the MTM method of accounting.

A Section 475 election for 2022 was due by April 18, 2022. The next opportunity to elect 475 is for 2023, by April 18, 2023. Learn the nuances of making a 475 election here.

“New taxpayers” (like a new entity) can elect Section 475 by internal resolution (not with the IRS) within 75 days of inception. New taxpayers don’t file Form 3115 since they have adopted the 475 MTM accounting method.

Excess business losses and net operating losses
The net Section 475 losses and TTS business expenses are subject to the excess business loss (EBL) limitation for the tax year 2022. You can aggregate EBL from all pass-through businesses. The inflation-adjusted 2022 EBL threshold is 540,000 (married)/$270,000 (other taxpayers). The amount over the EBL threshold is a net operating loss (NOL) carry forward.

TCJA repealed net operating loss (NOL) carrybacks (except for farmers) and limited NOL carryforwards to 80% of the subsequent year’s taxable income.

Qualified business income (QBI) deduction
There’s also a tax benefit on net Section 475 gains: the 20% QBI deduction. In a simple scenario, on a QBI of $100,000, the owner can deduct $20,000. That’s a tax deduction without spending any money.

Trading is a “specified service trade or business” (SSTB), which means an income cap applies. If your taxable income is over that cap, there is no QBI deduction. QBI includes Section 475 ordinary income, less TTS expenses, and excludes capital gains, portfolio income, and forex trading income. See the QBI income cap and phase-out range in Green’s 2023 Trader Tax Guide.

Schedule 6781 for futures
Section 1256 contract traders (i.e., futures) should use Form 6781 (unless they elected Section 475 for commodities/futures; those are reported on Form 4797). Section 1256 traders don’t use Form 8949 — they rely on a one-page Form 1099-B showing their net trading gain or loss (aggregate profit or loss on contracts). That amount is entered in summary format on Form 6781 Part I.

Section 1256 contracts enjoy lower 60/40 capital gains tax rates: 60% (including day trades) subject to lower long-term capital gains rates and 40% taxed as short-term capital gains using the ordinary rate. At the maximum tax bracket for 2022, the blended 60/40 rate is 26.8% — 10.2%, lower than the highest regular bracket of 37%.

Most futures traders skip a Section 475 election to retain 60/40 capital gains rates. See Section 1256 Contracts.

Section 1256 loss carry back election.
If a trader or investor has a significant Section 1256 loss, they should consider carrying back the loss three tax years but only apply it against Section 1256 gains in those years. To make this election, check box D labeled “Net section 1256 contracts loss election” on the top of Form 6781 filed on a timely basis.

For sales of cryptocurrencies, use Form 8949, but not wash sales or Section 475 MTM. See Cryptocurrencies

The IRS updated its question about digital assets on the 2022 Form 1040. Instead of asking about “virtual currency,” for 2022, the question asks: “At any time during 2022, did you: (a) receive (as a reward, award or payment for property or services); or (b) sell, exchange, gift or otherwise dispose of a digital asset (or a financial interest in a digital asset)?” (IR 2023-12, 1/24/2023).

Cryptocurrencies: recent bankruptcies: The IRS is considering issuing broader guidance and tax relief for crypto investors if the crypto is no longer traded on an exchange or the taxpayer is locked out of accessing the currency due to bankruptcy.” See Chief Counsel Memorandum (Number 202302011) and Crypto Investors Facing Losses Could Get IRS Guidance to Help (Bloomberg Law Feb. 10, 2023)

Tax treatment for financial products
We cover U.S. and international equities, U.S. futures, and other Section 1256 contracts, options, ETFs, ETNs, forex, precious metals, foreign futures, cryptocurrencies, and swap contracts.

It’s important to distinguish between securities vs. Section 1256 contracts with lower 60/40 capital gains rates vs. other financial products such as forex or swaps with ordinary income or loss treatment. Various elections are available to change tax treatment. See Tax Treatment On Financial Products.

Form 1099-B and wash sale loss adjustments
Proceeds, minus cost basis, plus wash sale loss adjustments equal net trading gain or loss using the realization method.

For example, the WS loss column could be $500,000, but most of that amount might be included in the cost basis column, so most wash sales are closed by the year’s end. What matters is how much WS loss is open and deferred to the subsequent tax year.

Buying back a losing December 2022 trade within 30 days into January 2023 triggers a 2022 WS loss added to the WS column on the 2022 Form 1099-B. The 2022 WS loss amount is removed from the 2022 cost basis column and is deferred to the 2023 cost basis. That reduces a December 2022 capital loss. Our blog post, How To avoid Phantom Income From Wash Sale Loss.

A TTS trader using Section 475 MTM accounting avoids WS loss adjustments and the $3,000 capital loss limitation. It’s okay to depart from the 1099-B.

Please take a look at 1099-B and the instructions.

Some brokers provide a Form 8949 worksheet, which can be imported into TurboTax.

Trade accounting using TradeLog
We had recommended TradeLog (TL) every year since 2001, when we helped bring Section 475 MTM accounting to the program. Use TL to download your trade history from your broker’s Website (not the 1099-B) and calculate WS according to IRS rules for taxpayers. TradeLog can also calculate WS according to IRS rules for brokers, which should match broker 1099-Bs. TL generates Form 8949 or Form 4797 (for Section 475 MTM).

You can license the TL software to do the trade accounting. Alternatively, TL can do this trade accounting for you as a service. Green, Neuschwander & Manning, LLC (GNM) offers trade accounting services using TradeLog to clients of GNM’s tax compliance service.

Business expenses if qualified for TTS

  • Tangible personal property like a computer, up to $2,500 per item.
  • Section 179 (100%), bonus, and regular depreciation on computers, equipment, furniture, and fixtures.
  • Amortization of start-up costs (Section 195), organization costs (Section 248), and software.
  • Education expenses paid and courses taken after the commencement of the trading business activity. (Otherwise, pre-business education may not be deductible or included a portion in Section 195 start-up costs.)
  • Trader business expenses
  • Books, publications, subscriptions, market data, online and professional services, chat rooms, mentors, coaches, supplies, phone, internet, travel, seminars, conferences, assistants, consultants, and accountants.
  • Home-office expenses for the business use portion of a trader’s home (share of the rent, mortgage interest, real estate tax, depreciation on home, utilities, repairs, insurance, and all other home costs).
  • Margin interest expenses (not limited to investment income).
  • Stock-borrow fees for short-sellers.
  • Internal-use software for automated trading systems.

Business deductions don’t include the following:

  • Vehicles. (Traders don’t use autos daily for business.)
  • Commissions are part of the trading gain or loss.

LLC partnerships and S-Corps
Submit Form 1065 for a general partnership or multi-member LLC choosing partnership treatment. Submit Form 1120-S for an S-corporation. Forms 1065 and 1120-S issue Schedule K-1s to the owners, so taxes are paid at the owner level rather than the entity level, thereby avoiding double taxation. (Partnership K-1, S-Corp K-1.)

Ordinary income or loss (primarily business expenses) is summarized on Form 1040 Schedule E rather than in detail on Schedule C. Section 179 depreciation is broken out separately on Schedule E, along with unreimbursed partnership expenses (UPE), including home-office expenses. For an S-Corp, use an accountable reimbursement plan before year-end rather than UPE.

Trading is not a passive loss activity
Under the “trading rule” exception in Section 469 passive-activity loss rules, trading business entities are considered “active” rather than “passive-loss” activities, so losses are allowed in full on Form 1040 Schedule E in the non-passive income column.

Schedule K-1
Portfolio income (interest and dividends) is stated separately on the partnership and S-Corp Schedule K-1s and passed through to the individual owner’s Schedule B. Capital gains and losses pass through to Schedule D in summary form.

Net taxes don’t change; pay them on the individual level. Pass-through entities file Form 8949 and Form 4797 at the entity level. Schedule K-1 line one, “ordinary business income (loss),” consolidates Form 4797 ordinary income or loss with business expenses, and it’s a net income amount if trading gains exceed business expenses. The entity also reports Section 1256 contracts and passes through lower 60/40 capital gains rates to the owners.

S-Corps arrange deductions for health insurance and retirement plan contributions.
TTS S-Corps provide opportunities for deducting retirement plan contributions and health insurance premiums, two breaks sole-proprietor traders and partnership traders can’t use unless they have earned income.

See Entity Solutions, Retirement Plan Solutions, and 2022 Year-End Tax Planning For Traders.

The 20% qualified business income deduction
Per TCJA, the 2022 partnership and S-Corp Schedule K-1s report QBI (Section 199A) income, wages, and property factors and whether the business is a specified service trade or business (SSTB). S-corp wages can take advantage of the QBI phase-out range. A sole proprietor using Section 475 is also eligible for the QBI deduction. Look to TTS trading gains on Form 4797 Part II, less Schedule C TTS expenses.

See About Form 7203, S Corporation Shareholder Stock and Debt Basis Limitations (

Common errors on tax return filings for traders

  • Some accountants intuitively think that TTS traders should enter trading income, loss, and expenses like other sole proprietors on Schedule C. That’s wrong and often causes an IRS notice or exam.
  • Some traders try to deduct significant capital losses on Schedule C after missing the Section 475 MTM election deadline for ordinary gain or loss treatment. They try to evade wash sale (WS) loss adjustments and capital loss limitations.
  • Section 475 trades are reported in detail on Form 4797 Part II ordinary gains and losses, not on Schedule C.
  • Some traders use TTS and 475 when they should not.

SE tax errors

  • Some traders and preparers treat TTS trading gains as self-employment income (SEI) subject to self-employment (SE) tax.
  • That’s incorrect unless the trader is a full-scale member of an options or futures exchange and trading Section 1256 contracts on that exchange (Section 1402i).

Adjusted gross income (AGI) errors

  • Some sole proprietor TTS traders incorrectly contribute to a retirement plan based on trading income and end up with an “excessive contribution” subject to tax penalties.
  • Some mistakenly take an AGI deduction for self-employed health insurance premiums, which also requires SEI, and trading income is not SEI.
  • A TTS trader needs an S-Corp to arrange retirement and health insurance deductions before the year-end.

Net investment tax errors
Include trading gains and losses in net investment income (NII) for calculating ACA 3.8% net investment tax (NIT).

  • Some traders omit to deduct TTS trading expenses from NII.
  • You cannot deduct investment fees and expenses from NII.

See Tax Center: ACA Net Investment Income Tax.

Tax extensions and tax payments are due

The 2022 income tax returns for individuals are due by April 18, 2023 — however, most active traders aren’t ready to file a complete tax return by then. Some brokers issue corrected 1099-Bs right up to the deadline or even beyond.

Many partnerships and S-Corps file extensions by March 15, 2023, and don’t issue final Schedule K-1s to investors until after April 18.

Traders don’t have to rush to complete their tax returns by April 18. They can take advantage of a simple one-page automatic extension and pay taxes owed to the IRS and state. Traders can request an automatic six-month extension to file individual federal income tax returns until Oct. 16, 2023.

Most states offer the same extension terms (pay them, too), or they might accept the federal extension if no balance is due the state. Check with your state beforehand.

The 2022 Form 4868 instructions indicate how easy it is to get this automatic extension — no reason is required. It’s an extension to file a complete tax return, not an extension to pay taxes owed. The taxpayer should estimate and report what they think they owe for 2022 based on the tax information received.

Avoid late-filing and late-payment penalties
We suggest taxpayers learn how the IRS and states assess late-filing and late-payment penalties so they can avoid or reduce them.

If taxpayers cannot pay the taxes owed, they should estimate the balance due by April 18 and report it on the extension. Be sure to at least file the automatic extension on time to avoid the late-filing penalties, which are much higher than the late-payment penalty. See the 2022 Form 4868, page two, for an explanation of how to calculate these penalties. 

Avoid underestimated tax penalties
Some traders made significant trading gains in 2022. Some used the estimated tax payment “safe harbor” exception to cover their 2021 tax liability with the fourth quarter (Q4) 2022 estimated tax payment made by January 17, 2023. They plan to pay the balance of taxes owed by April 18, 2023 and should consider setting aside and protecting those funds. Some will risk their tax funds in the markets. Taxpayers should be careful because losing the funds will cause significant trouble later in the year.

Tax relief in disaster situations
There have been many federal disaster situations around the U.S. these past years. See if you qualify to pay taxes and file tax returns after the original deadline.

See Tax Relief in Disaster Situations.

SALT cap workaround
TCJA capped state and local income, sales, and property taxes (SALT) at $10,000 per year ($5,000 for married filing separately) and did not index it for inflation. About 25 states enacted SALT cap workaround laws.

Search “(Your state) SALT cap workaround” to learn the details for your state. Most states follow a blueprint approved by the IRS.

Generally, it would be best if you elected to make a “pass-through entity” (PTE) payment on a partnership or S-Corp tax return filed by your business. It doesn’t work with a sole proprietorship filing a Schedule C. PTE is a business expense deduction shown on the state K-1, like a withholding credit.

Most states credit the individual’s state income tax liability with the PTE amount. Essentially, you convert a non-deductible SALT itemized deduction (over the cap) into a business expense deduction from gross income. Act well before year-end; otherwise, you might delay the benefit to next year. Learn the rules of your state.

See our recent Webinars and recordings covering this content.

2022 Year-End Tax Planning For Traders

October 25, 2022 | By: Robert A. Green, CPA | Read it on

Join our Webinars on Nov. 8 and 15, 2022, on Year-End Tax Planning For Traders, or watch the recordings afterward. 

Recent years’ tax acts don’t change trader tax status (TTS), Section 475 MTM accounting, wash-sale losses on securities, or the tax treatment on financial products, including futures (Section 1256 contracts) and cryptocurrencies (intangible property).

It’s helpful to consider IRS inflation adjustments in income and capital gains tax brackets, various income thresholds and caps, retirement plan contribution limits, standard deductions, and more. See IRS provides tax inflation adjustments for tax year 2022, and IRS provides tax inflation adjustments for tax year 2023. The IRS increase for 2023 is about 7%.

Excess business losses and net operating losses
Some traders eligible for trader tax status (TTS) and who filed a timely Section 475 election incurred ordinary business losses for 2022. Before the Tax Cuts and Jobs Act (TCJA) started in 2018, a TTS/475 trader could carry back a net operating loss (NOL) for two years, generating a tax refund. TCJA introduced an “excess business loss” (EBL) limitation, with the excess being an NOL carryforward. TCJA repealed NOL carrybacks (except for farmers) and limited NOL carryforwards to 80% of the subsequent year’s taxable income. CARES suspended TCJA’s EBL and NOL changes for 2018, 2019, and 2020 and allowed five-year NOL carrybacks (i.e., a 2020 NOL carryback to 2015). TCJA’s EBL and NOL carryforward rules apply for tax years 2021 through 2028. (See How Traders Elect 475 To Maximize Their Tax Savings.)

Defer income and accelerate tax deductions
Consider deferring income and accelerating tax deductions if you don’t expect your taxable income to decline in 2023.

Traders eligible for trader tax status in 2022 should consider accelerating trading business expenses, such as purchasing business equipment with first-year expensing using Section 179 or bonus depreciation.

Consider delaying sales of investments to defer capital gains. Defer bonuses at work.

Accelerate income and defer certain deductions
A TTS trader with substantial Section 475 ordinary losses should consider accelerating income to soak up the EBL. Try to advance enough income to use the standard deduction and take advantage of lower tax brackets. Stay below the threshold for unlocking various AGI-dependent deductions and credits. A higher income can lead to an IRMA adjustment raising Medicare premiums.

Roth IRA conversion
Consider a “Roth IRA Conversion,” changing a traditional IRA or 401(k) into a Roth IRA. Distributions from a standard retirement plan are taxed as ordinary income (not capital gains), whereas with a Roth IRA, distributions are tax-free.

On the conversion date, the market value of the traditional retirement account is conversion income taxed at ordinary rates. Futures growth and capital in the Roth IRA account are tax-free. If your retirement portfolio is depressed in value, you might enjoy recovery of values inside a Roth IRA.

Generally, there’s a 10% excise tax on “early withdrawals” from retirement plans before age 59½. With a Roth IRA conversion, you can avoid excise tax by paying conversion taxes outside the Roth plan. TCJA repealed the recharacterization option, so you can no longer reverse the conversion if the plan assets decline. Roth IRA conversions have no income limit, unlike regular Roth IRA contributions.

As an illustration, a taxpayer filing single has a $405,000 TTS/475 ordinary business loss. However, the excess business loss limitation for a single filing status in 2022 is $270,000 ($540,000 for married), so $135,000 is an NOL carryover. The taxpayer should consider a Roth conversion to soak up most of the $270,000 allowed business loss and leave enough income to use the standard deduction and lower tax brackets.

Zero tax rate on long-term capital gains in the lowest tax bracket
If you have a low income, consider realizing long-term capital gains by selling open positions held for more than 12 months. The 2022 long-term capital gains rates are 0% for taxable income in the 10% and 12% ordinary tax brackets. The 15% capital gains rate applies to the regular middle brackets, and the top capital gains rate of 20% applies to the top 37% ordinary income bracket. See capital gains tax brackets at Remember, if you go $1 over the zero-rate bracket, all the long-term gains are subject to the 15% capital gains rate; it doesn’t work like progressive marginal ordinary tax brackets.

Net investment income tax
Investment fees and expenses are not deductible for calculating net investment income (NII) for the Affordable Care Act (ACA) 3.8% net investment tax (NIT) on NII. NIT only applies to individuals with NII and modified adjusted gross income (AGI) exceeding $200,000 single, $250,000 married filing jointly, or $125,000 married filing separately. The IRS does not index these ACA thresholds for inflation. NII includes portfolio income, capital gains, and Section 475 ordinary income.

Business expenses and itemized deduction vs. standard deduction

Business expenses: TTS traders are entitled to business expenses and home-office deductions. The home office deduction requires income, except for the mortgage interest and real property tax portion. The SALT cap on state and local taxes does not apply to the home office deduction.

TCJA expanded first-year expensing of business property; traders can deduct 100% of these costs in the year of acquisition, providing they place the item into service before year-end. Traders with TTS in 2022 may consider going on a shopping spree before January 1. There is no sense in deferring TTS expenses because you cannot be sure you will qualify for TTS in 2023.

Employee business expenses: Ask your employer if they have an “accountable plan” for reimbursing employee-business costs. You must “use it or lose it” before year-end. TCJA suspended unreimbursed employee business expenses. TTS S-Corps should use an accountable plan to reimburse employee business expenses since the trader/owner is its employee.

Unreimbursed partnership expenses: Partners in LLCs taxed as partnerships can deduct unreimbursed partnership expenses (UPE). That is how they usually deduct home office expenses. UPE is more convenient than an S-Corp accountable plan because the partner can arrange the UPE after year-end. The IRS doesn’t want S-Corps to use UPE.

SALT cap: TCJA capped state and local income, sales, and property taxes (SALT) at $10,000 per year ($5,000 for married filing separately) and did not index it for inflation. About 25 states enacted SALT cap workaround laws. Search “(Your state) SALT cap workaround” to learn the details for your state. Most states follow a blueprint approved by the IRS.

Generally, elect to make a “pass-through entity” (PTE) payment on a partnership or S-Corp tax return filed by your business. It doesn’t work with a sole proprietorship filing a Schedule C. PTE is a business expense deduction shown on the state K-1 like a withholding credit. Most states credit the individual’s state income tax liability with the PTE amount. Essentially, you convert a non-deductible SALT itemized deduction (over the cap) into a business expense deduction from gross income. Act well before year-end; otherwise, you might delay the benefit to next year.

Investment fees and expenses: TCJA suspended all miscellaneous itemized deductions subject to the 2% floor, which includes investment fees and expenses. TCJA left an itemized deduction for investment-interest expenses limited to investment income, with the excess as a carryover.

Standard deduction: TCJA roughly doubled the 2018 standard deduction and suspended and curtailed several itemized deductions. The standard deduction for married couples filing jointly for the tax year 2023 rises to $27,700, up $1,800 (about 7%) from $25,900 in 2022. For single and married individuals filing separately, the standard deduction rises to $13,850 for 2023, up $900 from $12,950 in 2022, and for heads of households, the standard deduction will be $20,800 for the tax year 2023, up $1,400 from $19,400 in 2022.

Many taxpayers use the standard deduction, simplifying their tax compliance work. For convenience, some taxpayers may feel inclined to stop tracking itemized deductions because they figure they will use the standard deduction. Don’t overlook the impact of these deductions on state tax filings, where you might get some tax relief.

Estimated income taxes
Those who have reached the SALT cap don’t need to prepay 2022 state-estimated income taxes by December 31, 2022 (a strategy before TCJA). Taxpayers should pay federal and state estimated taxes owed by January 17, 2023, and the balance by April 18, 2023.

Many traders skip making quarterly estimated tax payments during the year, figuring they might incur trading losses later in the year. They can catch up with the Q4 estimate due by January 17, 2023, but might still owe an underpayment penalty for Q1 through Q3 quarters. Some rely on the safe harbor exception to cover their prior year’s taxes. (See Traders Should Focus On Q4 Estimated Taxes Due January 18.)

See IRS announces interest rate increases for the fourth quarter of 2022; 6% rate applies to most taxpayers starting October 1.

Adjust withholding on year-end paychecks
Employees should consider withholding additional taxes on year-end paychecks, which helps avoid underpayment penalties since the IRS treats wage withholding as being made throughout the year. This goes for officers/owners of TTS S-Corps.

Avoid year-end wash sale loss adjustments
Taxpayers should report wash sale (WS) loss adjustments on securities based on “substantially identical” positions across all accounts, including IRAs. Substantially identical means an equity, an option on that equity (equity option), and those equity options at different exercise dates. 

Conversely, brokers assess WS only on identical positions per the one account and report on the 1099-B for that account. Active securities traders should use a trade accounting program to identify potential WS loss problems across all their accounts, especially going into year-end.

In taxable accounts, a trader can “break the chain” by selling the position before year-end and not repurchasing a substantially identical position 30 days before or after in any taxable or IRA accounts. Avoid WS between taxable and IRA accounts throughout the year, as that is a permanent WS loss.

Starting a new entity effective January 1, 2023, can break the chain on individual account WS at year-end 2022, provided you don’t purposely avoid WS with the related party entity. The new entity can also elect Section 475 MTM.

WS losses might be preferable to capital loss carryovers at year-end 2022 for TTS traders. A Section 475 election in 2023 converts year-end 2022 WS losses on TTS positions (not investment positions) into ordinary losses in 2023. That’s better than a capital loss carryover into 2023, which might give you pause when making a 2023 Section 475 election. You want a clean slate with no remaining capital losses before electing Section 475 ordinary income and loss. (Learn how to read a broker 1099-B in connection with wash sale loss adjustments at How To Avoid Phantom Income From Wash Sale Loss Adjustments.)

Trader tax status and section 475
Traders who qualified for TTS in 2022 may accelerate trading expenses into that qualification period as sole proprietors or entities. Those who don’t qualify until 2023 should try to defer trading expenses until then. Traders may also capitalize and amortize (expense) Section 195 startup costs and Section 248 organization costs in the new TTS business, going back six months before commencement. TTS is a prerequisite for electing and using Section 475 MTM.

TTS traders choose Section 475 on securities to be exempt from wash-sale loss rules and the $3,000 capital loss limitation and be eligible for the 20% QBI deduction. To make a 2022 Section 475 election, individual taxpayers had to file an election statement with the IRS by April 18, 2022 (March 15, 2022, for existing S-Corps and partnerships). If they filed that election statement on time, they need to complete the election process by submitting a 2022 Form 3115 with their 2022 tax return. Those who missed the 2022 election deadline may want to consider the election for 2023. Capital loss carryovers are a concern — they can be used against capital gains but not Section 475 ordinary income. The 475 election remains in effect each year until it is revoked in the same manner as the election was made.

A Section 475 election made by April 18, 2023, takes effect on January 1, 2023. When converting from the realization (cash) method to the mark-to-market (MTM) method, a Section 481(a) adjustment needs to be made on January 1, 2023. The adjustment essentially reports in 2023 taxable income the unrealized capital gains and losses on open TTS securities positions held on December 31, 2022. The adjustment should not be made for year-end investment positions, and those who don’t qualify for TTS at year-end 2022 won’t have a Section 481(a) adjustment to report for the 2023 tax year. A “new taxpayer” entity can elect Section 475 within 75 days of inception — a good option for those who missed the individual sole proprietor deadline (April 18, 2022). Forming a new entity on November 1, 2022, or later is too late for establishing TTS for the 2022 year within the entity; we like to see all of Q4 for entity TTS eligibility at a minimum. Consider waiting until January 1, 2023, to start a new TTS entity and elect Section 475.

20% deduction on qualified business income
In 2018, TCJA introduced a 20% qualified business income deduction (QBI). In a simple scenario, on a QBI of $100,000, the owner might be able to deduct $20,000. That’s a tax deduction without spending any money.

Trading is a “specified service trade or business” (SSTB), which means an income cap applies. If your taxable income is over that cap, there is no QBI deduction. QBI includes Section 475 ordinary income, less TTS expenses, and excludes capital gains, portfolio income, and forex trading income.

Taxpayers might be able to increase the QBI deduction with thoughtful year-end planning. Suppose taxable income falls within the phase-out range for a specified service activity or even above for a non-service business. You might need higher S-Corp wages (including officer compensation) to avoid a W-2 wage limitation on the QBI deduction. Deferring income can also help get under various QBI restrictions and thresholds. (Learn more about QBI, the thresholds, and income caps at How Traders Elect 475 To Maximize Their Tax Savings.)

Suspending TTS and Section 475
Tens of thousands of new TTS traders joined the profession during the Covid pandemic in 2020 and 2021, and many did well in those years. With the advent of a bear market correction in 2022, some “Covid traders” incurred substantial losses, and several stopped TTS trading. Perhaps, they are eligible for TTS and Section 475 for part of the year.

Assume a TTS/475 trader stopped trading on June 30, 2022. They must use Section 475 through June 30, 2022, but may not use it for the remainder of the year. TTS and 475 are “suspended” until and unless the trader is eligible again for TTS in a subsequent year. The trader can also revoke the 475 election for 2023 by April 18, 2023, in a mirror process to making a 475 election. Without 475 going into year-end, the trader should try to avoid wash sale loss adjustments at year-end. (See Will The IRS Deny Tax Benefits To Traders Due To Covid?)

S-Corp officer compensation
TTS traders use an S-Corp to arrange health insurance and retirement plan deductions. These deductions require earned income or self-employment income. Unlike trading gains which are unearned income, a TTS S-Corp salary is considered earned income.

S-Corps pay officer compensation in conjunction with employee benefit deductions through payroll tax compliance done before year-end 2022. Otherwise, traders miss the boat. TTS is a must since an S-Corp investment company cannot have tax-deductible wages, health insurance, and retirement plan contributions. A trading S-Corp is not required to have “reasonable compensation,” so a TTS trader may determine officer compensation based on how much to reimburse for health insurance and how much they want to contribute to a retirement plan. Remember, sole proprietor and partnership TTS traders cannot pay salaries to 2% or more owners; hence the S-Corp is needed.

S-Corp wages impact the SALT cap workaround, which hinges on net income after wages. If you fall into the QBI phase-out range, wages are required to increase the QBI deduction. This decision-making has many moving levers, so consult your CPA in early December for year-end tax planning.

S-Corp health insurance
S-Corps may only deduct health insurance for the months it was operational and qualified for TTS. Employer-provided health insurance, including Cobra, is not deductible.

The S-Corp reimburses the employee/owner through the accountable reimbursement plan before year-end. Add the health insurance reimbursement to taxable wages but do not withhold social security or Medicare taxes from that portion of W-2 compensation. The officer/owner takes an AGI deduction for health insurance on their tax return.

A taxpayer can deduct a contribution to a health savings account (HSA) without TTS or earned income. HSA contribution limits for 2022 are $3,650 for individuals and $7,300 family, with an additional $1,000 for those aged 55 or older. HSAs must be funded and utilized before year-end.

S-Corp retirement plan contribution
TTS S-Corps can unlock a retirement plan deduction by paying sufficient officer compensation in December 2022 when results for the year are evident. Net income after deducting wages and retirement contributions should be positive.

If desired, you must establish a Solo 401(k) retirement plan for a TTS S-Corp with a financial intermediary before the year-end. Plan to pay the 100%-deductible “elective deferral” amount up to a maximum of $20,500 (or $27,000 if age 50 or older with the $6,500 catch-up provision) with the December 2022 payroll. That elective deferral is due by the end of January 2023. You can fund the 25% profit-sharing plan (PSP) portion of the S-Corp Solo 401(k) up to a maximum of $40,500 by the 2022 S-Corp tax return, including an extension, which means September 15, 2023. The maximum PSP contribution requires wages of $162,000 ($40,500 divided by 25% defined contribution rate). Tax planning calculations will show the projected outcome of income tax savings vs. payroll tax costs for the various options.

The IRS raised the 401(k) elective deferral for 2023 to $22,500, up by $2,000 (9.8%) from 2022. The catch-up contribution limit is increased to $7,500, up by $1,000 from 2022. See IRS site 401(k) limit increases to $22,500 for 2023, IRA limit rises to $6,500.

Consider a Solo 401(k) Roth for the elective-deferral portion only, where the contribution is not deductible, but the contribution and growth within the Roth are permanently tax-free. Traditional plans have a tax deduction upfront, and all distributions are subject to ordinary income taxes in retirement.

Traditional retirement plans have required minimum distributions (RMD) by age 72, whereas Roth plans don’t have RMD. CARES waived RMD for 2020, but RMD applies for 2021, 2022, and subsequent years.

Have your new entity ready on January 1, 2023
If you missed employee benefits (health insurance and retirement contributions) in 2022, consider an LLC with an S-Corp election for the tax year 2023. Or maybe you want a spousal-member LLC taxed as a partnership for 2023 to maximize the SALT cap workaround and segregate trading from investing.

If you want the new entity to be ready to trade on the first trading day of January 2023, consider the following plan. Form a single-member LLC in December 2022, obtain the employee identification number (EIN) online, and open the LLC brokerage account before year-end to be ready to trade as of January 1, 2023. The single-member LLC is a “disregarded entity” for the tax year 2022, which avoids an entity tax return filing for the 2022 initial short year. You can add your spouse as an LLC member on January 1, 2023, creating a partnership tax return for 2023. 

If you want health insurance and retirement plan deductions for 2023, then your single-member or spousal-member LLC should submit a 2023 S-Corp election within 75 days of January 1, 2023.

The partnership or S-Corp is a “new taxpayer” to make an internal resolution to elect Section 475 MTM on securities only for 2023 within 75 days of January 1, 2023. Otherwise, existing partnerships or S-Corps must file an external 475 election statement with the IRS by March 15, 2023.

Tax-loss harvesting
If you have an investment or trading portfolio, you can reduce capital gains taxes via “tax-loss harvesting” before the year-end. If you realized significant capital gains year-to-date in 2022 and have open positions with substantial unrealized capital losses, consider selling some of those losing positions to reduce 2022 taxes on capital gains.

Be sure to wait 30 days to repurchase those securities to avoid wash sale loss adjustments, which would postpone the 2022 year-end tax loss to 2023, thereby defeating the concept of tax loss selling.

You don’t have to wait if you buy a similar security, providing it’s not “substantially identical.” For example, an exchange-traded fund (ETF) like SPY is substantially identical to options on SPY (the derivative) but not to other ETFs that track the S&P 500. The symbol SPX is a stock index future, a Section 1256 contract, which is not a security, so that’s okay to use to avoid wash sales.

Tax efficient sales
If you want to sell some of your portfolios, consider taking long-term capital gains subject to lower tax rates (0%, 15%, and 20%) vs. short-term capital gains taxed at ordinary rates. That might require you to use the “specific identification accounting method” vs. first-in-first-out (FIFO). (See FIFO vs. Specific Identification Accounting Methods.)

Straddles and the constructive sale rules
The IRS has rules to prevent the deferral of income and acceleration of losses in offsetting positions that lack sufficient economic risk. These rules include straddles, the constructive sale rule, and shorting against the box. Also, be aware of the “constructive receipt of income” — you cannot receive payment for services, turn your back on that income, and defer it to the next tax year.

Selling the losing legs on a complex options trade with offsetting positions can trigger the straddle loss deferral rules.

Charitable contributions
Consider a charitable remainder trust to bunch philanthropic contributions for itemizing deductions. (Ask Fidelity or Schwab about it.)

Another option is: Donate appreciated securities to charity. You get a charitable deduction at the fair market value and avoid capital gains taxes. (This is a favorite strategy by billionaires, and you can use it, too.)

Consider directing your traditional retirement plan to make “qualified charitable distributions.” That satisfies the RMD rule, and it’s not taxable income. It’s the equivalent of an offsetting charitable deduction, allowing you to take the standard deduction rather than itemize charitable contributions.

In 2020 and 2021, the limit on charitable contributions increased to 100% of AGI. The limit reverts to the 50% limit for 2022. (See the IRS site for Charitable Contribution Deductions.)

Tax relief: presidentially declared disaster areas
There were many disasters in 2022, including hurricanes and wildfires. Check the site for Tax Relief in Disaster Situations.

Star Johnson, CPA, contributed to this blog post.

How To Avoid Phantom Income From Wash Sale Loss Adjustments

September 22, 2022 | By: Robert A. Green, CPA | Read it on

Day and swing traders inevitably trigger many wash sale loss adjustments (WS) amounting to tens or hundreds of thousands of dollars. Take a loss on a security, repurchase it within 30 days (after or before), and that creates a WS loss.

A WS reduces the cost basis on the position sold and adds the WS loss to the replacement position’s cost basis. That defers the WS loss, creating phantom taxable income and capital gains taxes.

It’s okay to incur WS losses during the year but try to avoid delaying the WS losses to the following year. Deferring a loss from November to December is acceptable; however, postponing a loss from December 2022 to January 2023 is not.

Learn how to “break the WS chain” at year-end. For example, sell your entire position in security A by December 20, 2022, and don’t repurchase security A for 30 days to around January 21, 2023. That doesn’t provide a WS bridge from the tax year 2022 to 2023. Deduct the whole year of WS losses in 2022, with no deferral of WS losses to 2023.

When you get your broker-issued Form 1099-B showing massive WS loss adjustments, don’t panic. What’s critical is the number of WS open at year-end for which you repurchased positions within 30 days in January 2023. For example, suppose the WS loss adjustments column on the 1099-B is $500,000. If you avoided all WS at year-end by refraining from repurchases in January, the Cost Basis column should be $500,000 greater than your actual purchase price.

On the 1099-B, calculate taxable income by Proceeds, minus Cost Basis, plus WS loss adjustments.

There’s a quirky WS rule between taxable and IRA accounts. The WS loss becomes permanent if you take a loss in a taxable account and repurchase the security position within 30 days in an IRA.

The IRS does not allow you to add the WS loss adjustment to the IRA cost basis. Yet, the IRS requires a reduction of the cost basis in the taxable account.

Avoid this problem with a “do not invest list” in the IRAs vs. what you trade and invest in taxable accounts.

This WS rule applies to taxable vs. IRA accounts; an IRA account on its own is not subject to WS losses.

A trader eligible for trader tax status with a Section 475 MTM election is exempt from WS on trades. 

Learn more about WS loss rules at

How to Set Up A Trading Business For Optimal Tax Savings

June 18, 2022 | By: Robert A. Green, CPA | Read it on

If you are eligible for trader tax status (TTS), consider setting up a trading business to maximize tax benefits. Some traders benefit from an LLC; others don’t need one.

  • Deduct trading business expenses.

  • Elect Section 475 MTM for exemption from wash sales and the capital loss limitation.

  • Be eligible for a 20% qualified business income QBI deduction on Section 475/TTS income.

  • Deduct health insurance and high-deductible retirement plan contributions.

  • Deduct state and local taxes (SALT) as a pass-through entity (PTE) business expense avoiding the $10,000 SALT cap.

How to be eligible for trader tax status

Volume: Make four trades per day, 16 trades per week, 60 a month, and 720 per year on an annualized basis (Poppe court). Count each open and closing transaction separately.

Frequency: Executes trades on nearly four weekly days, around a 75% frequency rate.

Holding period: In the Endicott court, the IRS said the average holding period must be 31 days or less. That’s a bright-line test.

Trade full-time or part-time. For a good portion of the day, the markets are open.

Hours: Spend more than four hours daily, almost every market day, working on the trading business — all time counts.

Avoid sporadic lapses: Once TTS commences, avoid lapses in the trading during the year. Trading must be regular, frequent, and continuous.

Intend to run a business and make a living. It doesn’t have to be a primary living.

Operations: Have significant business equipment, business services, and a home office.

Account size: Securities traders need to have $25,000 on deposit with a U.S.-based broker to achieve pattern day trader (PDT) status. For the minimum account size, we like to see more than $15,000.


What doesn’t qualify for TTS?

A third party creates the automated trading system (ATS) with entry and exit signals and mechanical execution. Some ATS don’t come with automatic execution, and traders significantly depart from ATS signals so that the trader can count those trades. A self-created ATS counts for TTS. Many traders come from the tech world and design and code an ATS.

A trade copying service does not count for TTS unless you depart from recommended trades significantly.

Engaging an outside investment advisor.

Trading in retirement funds.

Choice Of Entity

File a Schedule C with Form 1040

An individual TTS trader deducts business expenses, startup costs, and home office deductions on a Schedule C (Profit or Loss From Business – Sole Proprietorship) as part of the 1040 filing.

Traders don’t have revenue on Schedule C; they report trading gains and losses on other tax forms.

Schedule C expenses are an above-the-line deduction from gross income.

TTS Schedule C expenses also reduce self-employment income (SEI). However, trading income is not SEI unless you are a full futures exchange member per Section 1402(i). 

Trading income is net investment income (NII) for the 3.8% net investment tax on NII over ACA thresholds.

Individual brokerage account

You can establish an individual brokerage account(s) in the trader’s name and social security number. 

You can also use a joint individual account, but first, list the trader’s name and social security number.

If the husband trades the spouse’s account, neither can qualify for TTS.

Individuals pay non-professional rates for real-time data, whereas entities might owe higher professional rates.

No election or filing need for TTS

There isn’t a tax election for claiming TTS — it’s determined based on facts and circumstances assessed at year-end.

A TTS trader can elect Section 475 to treat MTM as ordinary gain or loss. But the 475 election is due early in the tax year.

TTS is like undergraduate school, and Section 475 is like grad school. You can claim TTS after the fact, but not 475. That hurts many traders in 2022, especially if they rack up massive losses and miss the 475-election deadline for existing individuals due by April 18, 2022. (March 15 for partnerships and S-Corps).

Single-member LLC

If you want asset protection, consider a single-member LLC (SMLLC) taxed as a “disregarded entity.” That’s a “tax nothing” in the eyes of the IRS. You still file as a TTS sole proprietor on Schedule C.

Traders don’t have investors or clients; that would be an investment management business subject to liability concerns.

A TTS trader might hire employees, lease an office, co-locate automated trading equipment with a broker, and use massive leverage. These traders should consider liability protection using an SMLLC. Consult an attorney. 

An SMLLC can also elect S-Corp or C-Corp tax status.

Business expenses with trader tax status

Tax-deductible business expenses include home-office, education, startup expenses, organization expenses, margin interest, tangible property expense, Section 179 (100%) or 100% bonus depreciation, amortization on software, self-created automated trading systems, mentors, seminars, market data, charting services, stock borrow fees, and much more.


Section 475 tax benefits

TTS traders are entitled to make a Section 475 election, but investors may not.

The election exempts securities trades from wash-sale loss (WS) adjustments, which can defer tax losses to the subsequent year and the $3,000 capital loss limitation. Ordinary loss treatment is better; it can generate tax refunds faster.

A TTS/475 trader is eligible for a 20% qualified business income (QBI) deduction if under the taxable income threshold for a “specified service trade or business” (SSTB). QBI includes 475 ordinary income less TTS expenses, excluding capital gains and portfolio income.

Section 475 election process 

The deadline for a  TTS trader to elect Section 475 for 2022 has passed; it was April 18, 2022, for individuals and March 15, 2022, for existing partnerships and S-Corps.

A partnership or S-Corp formed during the tax year is considered a “new taxpayer,” which can elect Section 475 internally within 75 days of inception. A new entity comes in handy for selecting 475 later in the year.


The qualified business income deduction

TCJA introduced a tax benefit for pass-through businesses, which includes a TTS trader with Section 475 income: whether doing business as a sole proprietor, partnership, or S-Corp.

Section 199A provides a 20% QBI deduction on a “specified service trade or business” (SSTB), and TTS trading is an SSTB.

SSTBs are subject to a taxable income threshold, phase-out range, and an income cap. The phase-out range has wage and property limitations, too.

As an SSTB, TTS traders have a taxable income (TI) cap of $440,100/$220,050 (married/other taxpayers) for 2022. The phase-out range below the cap is $100,000/$50,000 (married/other taxpayers), in which the QBI deduction phases out for SSTB. The W-2 wage and property basis limitations also apply within the phase-out range. 

For example, on $100,000 of TTS/475 income, the trader might get a $20,000 tax deduction.

LLC taxed as a partnership

A TTS trader can organize a spousal-member LLC and file as a partnership. Only one spouse needs to be an active trader.

LLC/partnerships file a Form 1065 partnership tax return and issue Schedule K-1s to owners.

LLC/partnerships must qualify for TTS; otherwise, they are investment companies.

With TTS, report business expenses on page one of 1065. List net 475 income or loss, less TTS expenses on line one of the Schedule K-1 “ordinary business income (loss).” Use separate K-1 line items for portfolio income, including capital gains and losses, interest, and dividends.

The owner reports Schedule K-1 ordinary business income (loss) on Form 1040 Schedule E in the active column.

It’s not a passive activity in Section 469 under the “trading rule” exception. However, losses are limited to “basis” (your net investment in the partnership). (Sole proprietor TTS traders also need a basis for deducting losses.)

Report capital gains/losses and portfolio income separately on 1040—schedule B for interest and dividend income and Schedule D for capital gains and losses from partnerships.

If the partnership agreement provides for it, the partner can also deduct “unreimbursed partnership expenses” (UPE), including home office expenses, on Schedule E page 2. (It’s more formal with an S-Corp.)

An LLC/partnership provides a ring-fencing solution and the SALT cap workaround strategy. It cannot generate earned income for the health and retirement plan deductions; you need an S-Corp for employee benefits.

Ring-fence trading from investments with a partnership or S-Corp

If you trade substantially-identical positions that you invest in a taxable account, it could invite the IRS to play havoc with reclassification. It can also undermine eligibility for TTS. For example, you invest in Apple and Microsoft equities for the long-term and also trade Apple and Microsoft equity options around those investment positions. 

A partnership or S-Corp can fix this problem. The entity can ring-fence TTS/475 trading positions, segregating them from overlapping investments on the individual level. But that isn’t easy if you want to maximize portfolio margining.

This entity solution prevents the IRS from reclassifying TTS positions out of Section 475 ordinary losses into a capital loss limitation and, alternatively, reclassifying unrealized long-term capital gains into MTM income.

If you don’t have overlapping investments, you don’t need a ring-fencing entity solution.

Avoid permanent wash sale losses between taxable and IRA accounts

If you trade substantially-identical positions that you also invest in IRAs, it could trigger losses for permanent wash sale loss adjustments (WS). Brokers don’t recognize this problem on 1099-Bs; the IRS permits them to take a narrow view of WS.

Take a loss on X in a taxable account and repurchase X within 30 days before or after in an IRA, and it’s a permanent WS loss. There is no way to record the WS cost basis adjustments in the IRAs; hence it’s permanent. Conversely, with WS in taxable accounts, you defer the loss to the replacement position, which the broker does on the 1099-B. 

There are three ways to avoid these IRA-generated WS. Use a do not trade or invest list to prevent overlap, elect 475 on trades, or use a ring-fencing entity solution. If you only trade an IRA account, there is no WS; it’s only a problem between taxable vs. IRS accounts with overlap. 

SALT cap workaround laws

In 2018, TCJA capped SALT itemized deductions at $10,000 per year, including state and local income taxes, property, and sales taxes. Over 20 states provide relief with SALT cap workaround laws. Business owners of partnerships or S-Corps are entitled to make SALT payments through the entity and get a credit on their individual tax returns. That converts non-deductible SALT into a business expense.

Search “SALT cap workaround” with your state. Act on time to get this deduction; it requires planning.


LLC taxed as an S-Corp

Organize a single-member or spousal-member LLC and elect S-Corp status with the IRS within 75 days of inception (date on the certificate of formation).

Alternatively, in a subsequent year, the LLC can submit an S-Corp election by March 15. 

Owners must be U.S. residents.

An LLC/S-Corp can achieve the ring-fencing and SALT cap workaround solutions of partnerships previously discussed.
 Consider an S-Corp if you also want health insurance and retirement plan deductions.


Health insurance deduction with an S-corp

TTS traders with significant health insurance (HI) premiums should consider an S-Corp to arrange an AGI tax deduction.

The trader or spouse might have another source of self-employment income to deduct HI. A spouse might have HI coverage for the family in their job. Cobra is not deductible HI since it’s employer-provided.

Add reimbursement of HI premiums to officer compensation, and that portion of salary is not subject to payroll taxes (social security and Medicare). The trader then can take an AGI deduction for the HI premiums on their Form 1040. (It’s quirky).

A TTS sole proprietor or partnership cannot deduct HI based on trading income.

Retirement plan contribution/deduction with an S-Corp

Traders need “earned income” to make and deduct retirement plan contributions and health insurance premiums; however, trading income is unearned.

TTS sole proprietors and partnerships cannot create earned income, whereas S-Corps can pay officer compensation, generating earned income.

Payroll taxes apply on officer compensation (wages): 12.4% FICA capped on salaries up to $147,000 for 2022, and the 2.9% Medicare is unlimited. There’s a 0.9% surtax over the ACA income threshold.

Upper-income traders convert Medicare tax on unearned income (net investment tax) into Medicare on earned income, so it’s not redundant.

Annual payroll at year-end

TTS traders should fund retirement plan contributions from net income, not losses.

It’s okay to have a loss generated by the HI reimbursement portion of compensation.

It’s best to wait on the execution of an annual paycheck until early December when there is transparency for the year.

Solo 401(k) elective deferral

If you have sufficient trading profits for the year, consider establishing a Solo 401(k) retirement plan before year-end.

Start with the 100% deductible elective deferral (ED; $20,500 for 2022) and pay it through payroll. Deduct it on the annual W-2.

Taxpayers 50 years and older have a “catch-up provision” of $6,500, raising the 2022 ED limit to $27,000 annually.

The ED can be contributed to a Roth IRA, forgoing the tax deduction on the contribution. Roth plans are permanently tax-free, whereas traditional programs provide deferral of income.

Solo 401(k) profit-sharing plan

Consider a 25% deductible Solo 401(k) profit-sharing plan (PSP) contribution if you have sufficient trading gains. Increase payroll in December 2022 for a performance bonus. You don’t have to pay into the retirement plan until the due date of the S-Corp tax return (including extensions by September 15, 2023).

The maximum PSP amount for 2022 is $40,500, increased by $2,000 from 2021.

The total 2022 limit for a Solo 401(k) is $67,500 ($20,500 ED, $6,500 catch-up ED, and $40,500 PSP).

See and

C-Corps are not suitable for traders

C-Corps are not ideal for traders since the IRS might charge a 20% “accumulated earnings tax” (AET) on top of the 21% flat tax rate.

It’s hard for a trader to have a war chest plan to justify retaining earnings and profits (E&P). Otherwise, AET applies to E&P.

There’s double state taxation to consider, too.


Traders are eligible for some business tax benefits and have unique needs. For example, their income is unearned, yet it can qualify for QBI deductions with a 475 election and the SALT cap workaround as capital gains or 475 income. Creating earned income for employee benefits requires the S-Corp. A local accountant might follow their intuition and give wrong advice. TTS benefits are quirky and challenging to arrange correctly. This blog post should help and consider a consultation with a trader tax expert. 


How Traders Elect 475 To Maximize Their Tax Savings

February 3, 2022 | By: Robert A. Green, CPA | Read it on

Avoid wash sale losses and the $3,000 capital loss limitation and qualify for a 20% QBI deduction.

The most significant problem for investors and traders occurs when they cannot deduct trading losses on tax returns, significantly increasing tax bills or missing opportunities for tax refunds. Investors are stuck with this problem, but business traders with trader tax status (TTS) can avoid it by filing timely Section 475 mark-to-market (MTM) elections for business ordinary tax-loss treatment for securities and/or commodities (Section 1256 contracts).

Profitable traders might also benefit from Section 475. If a TTS trader wants to be eligible for a 20% qualified business income (QBI) deduction, she should consider electing Section 475 ordinary income treatment. The QBI deduction is not allowed if the taxpayer exceeds a taxable income threshold because trading is a specified service business. (See more below).

Capital losses vs. 475 ordinary losses
Securities and Section 1256 investors are stuck with capital-loss treatment, meaning they’re limited to a $3,000 net capital loss against ordinary income. The problem is that their trading losses may be much higher and not valuable as a tax deduction in the current tax year. Capital losses first offset capital gains in full without restriction. The rest are a capital loss carryover to the following tax year(s). Many traders wind up with little money to trade and unused capital losses. It can take many years to use up their capital loss carryovers. What a tragic waste! Why not get tax savings from using Section 475 MTM right away? 

Traders qualifying for TTS have the option to elect Section 475 MTM accounting with ordinary gain or loss treatment in a timely fashion. You can offset wage and other income with MTM ordinary losses, navigating around the capital loss limitation. When traders have negative taxable income generated from business losses, Section 475 accounting classifies them as net operating loss (NOL) carryovers.

Caution: Individual business traders who missed the 2021 Section 475 MTM election date (May 17, 2021, one-month pandemic postponement deadline, and June 15, 2021, for Texas, Oklahoma, and Louisiana under federal storm disaster relief) can’t claim this treatment for 2021 and will be stuck with capital-loss carryovers to 2022.

Taxpayers without a significant capital-loss carryover may want to consider electing Section 475 for 2022 by the deadlines of April 18, 2022, or March 15, 2022, for existing partnerships and S-Corps. (See 475 election procedures below.)

A “new taxpayer” (new entity) set up after April 18, 2022, can deliver Section 475 MTM for the rest of 2022 on trading losses generated in the entity account if it files an internal Section 475 MTM election within 75 days of entity inception. This election does not change the character of capital loss treatment on the individual accounts before the entity’s start date.

Section 475 trades are exempt from wash sale loss adjustments
The election exempts the Section 475 transactions from wash-sale loss (WS) adjustments on securities, which would otherwise defer tax losses to replacement positions. If WS happens around year-end, it might create a phantom taxable income because it defers tax losses to the subsequent year.

Section 475 MTM allows current-year trading losses to be ordinary business losses rather than a $3,000 capital loss limitation. It generates significant tax breaks immediately, rather than being stuck with large capital-loss carryovers to subsequent tax years. Many traders enjoyed trading gains in 2020 and 2021, and tax-loss insurance was not essential. However, 475 ordinary loss treatments might be crucial in 2022.

Section 475 MTM also reports year-end unrealized gains and losses as marked-to-market, which means one must impute sales for all open trading business positions at year-end using year-end prices. Many traders have no open business positions at year-end, anyway. They report the realized and unrealized gains and losses, like Section 1256, which has MTM built-in by default — but don’t confuse Section 1256 with Section 475. MTM treatment is what makes wash sale losses a moot point.

Section 475 is ideal for securities traders.
Securities traders usually elect Section 475 MTM unless they already have significant capital-loss carryovers. Traders can’t offset MTM ordinary trading gains with capital-loss carryovers; only use capital gains (such as gains from segregated investment positions or Section 1256 contracts) in such a manner. However, suppose a trader generates significant new trading losses before April 18, 2022. In that case, she might prefer to elect Section 475 MTM for 2022 by that sole proprietor election date to have business ordinary-loss treatment retroactive to January 1, 2022. The trader can form a new entity afterward for a “do-over” to use capital gains treatment and get back on track with using up capital loss carryovers. Alternatively, the trader can revoke the Section 475 election in the subsequent tax year.

Consider electing Section 475 on securities only to retain lower 60/40 capital gains rates on Section 1256 contracts.

Excess business losses and net operating losses
Starting in 2018, The Tax Cuts and Jobs Act (TCJA) repealed the two-year NOL carryback, except for certain farming losses and casualty and disaster insurance companies. These TCJA changes mean NOLs are carried forward indefinitely (20 years before the TCJA changes), and the deduction of NOLs is limited to 80% of the subsequent year’s taxable income.

TCJA also introduced an “excess business loss” (EBL) limitation of $500,000 married and $250,000 for other taxpayers. The inflation-adjusted 2021 EBL is 524,000 (married)/$262,000 (other taxpayers) and 2022 EBL is $540,00 (married)/$270,00 (other taxpayers). Business ordinary losses over the EBL limits are an NOL carryforward.

The 2020 CARES Act suspended the EBL limitation for 2018, 2019, and 2020 and allowed five-year NOL carrybacks for those years. Taxpayers can recalculate the NOLs without the EBL limitation and file a carryback refund claim if it makes sense. For example, carry back a 2020 NOL to 2015 and any unused NOL to 2016 and subsequent years. TCJA’s NOL and EBL rules applied again in 2021 and 2022.

20% deduction on qualified business income
TCJA introduced a new tax deduction for pass-through businesses, including sole proprietors, partnerships, and S-Corps. Subject to haircuts and limitations, a pass-through business could earn a 20% deduction on qualified business income (QBI).

QBI includes Section 475 ordinary income and loss and trading business expenses. QBI excludes capital gains and losses, Section 988 forex ordinary income or loss, dividends, and interest income.

Traders eligible for TTS are a “specified service activity,” which means if their taxable income is above an income cap, they won’t receive a QBI deduction. The taxable income (TI) cap is $429,800/$214,900 (married/other taxpayers) for 2021, and $440,100/$220,050 (married/other taxpayers) for 2022. The phase-out range below the cap is $100,000/$50,000 (married/other taxpayers), in which the QBI deduction phases out for specified service activities. The W-2 wage and property basis limitations also apply within the phase-out range. 

TCJA favors non-service businesses, which are not subject to an income cap. The W-2 wage and property basis limitations apply above the TI threshold of $329,800/$164,900 (married/other taxpayers) for 2021 and $340,100/$170,050 (married/other taxpayers) for 2022. The IRS adjusts the annual TI threshold for inflation each year. 

Sole proprietor TTS traders cannot pay themselves wages, so they likely cannot use the phase-out range, and the threshold is their cap.

475 election procedures
Section 475 MTM is optional with TTS. Existing taxpayer individuals who qualify for TTS and want it must file a 2022 Section 475 election statement with their 2021 tax return or extension by April 18, 2022—existing partnerships and S-Corps file in the same manner by March 15, 2022.

Election statement. The MTM election statement is a short paragraph; unfortunately, the IRS hasn’t created a tax form for it. It’s a version of the following: “According to Section 475(f), the Taxpayer elects to adopt the mark-to-market method of accounting for the tax year ending December 31, 2022, and subsequent tax years. The election applies to the following trade or business: Trader in Securities as a sole proprietor (for securities only and not commodities/Section 1256 contracts).” If a trader expects to have a loss in trading Section 1256 contracts, he can modify the parenthetical reference to say, “for securities and commodities/Section 1256 contracts.” But remember, the lower 60/40 tax rates on Section 1256 contracts will no longer apply. If the taxpayer trades in an entity, he should delete “as a sole proprietor” in the statement.

Form 3115 filing. Don’t forget an essential second step: Existing taxpayers complete the election process by filing Form 3115 (change of accounting method) with the election-year tax return. Complete a 2022 MTM election filed by the April 18, 2022 deadline on Form 3115 filed with your 2022 tax returns — by the due date of the return, including extensions. 

Submit Form 3115 in duplicate — one goes with Form 1040 filing, and a second goes to the IRS national office. There’s no fee for filing Form 3115, and the election is automatic. That means the IRS should not confirm this election statement or the Form 3115 filing.

Forms 4797 and 3115 include a section for reporting a Section 481(a) adjustment, which is required when making a change of accounting. The rest of the multi-page Form 3115 relates to tax law, code sections, etc. This adjustment converts your bookkeeping from cash to MTM on January 1 of the election year.

After filing their Section 475 election statement, some traders changed their minds and wanted to skip the Form 3115 filing. That’s wrong and incumbent on them to finish up the election process. If a trader doesn’t qualify for TTS, they can’t use Section 475, but that must be based on accurate facts and circumstances and not on a whim. It’s essential to be consistent and credible with the IRS.

Internal elections for new entities
The Section 475 election procedure is different for “new taxpayers” like a new entity. Within 75 days of inception, a new taxpayer may file the Section 475 election statement internally in its records. The new entity does not have to submit Form 3115 because it’s adopting Section 475 from the start rather than changing its accounting method. One way to file an internal resolution is for the taxpayer to send himself an email resolution (election), which has a timestamp for proof of timely election.

Individuals are “new taxpayers” only if they have never filed an income tax return before. A new trader is not necessarily a new taxpayer for a 475 election.

Election to revoke section 475
The IRS makes revocation a free and easy process, mirroring the Section 475 election and automatic change of accounting procedure for existing taxpayers. A taxpayer cannot re-elect Section 475 for five years after revocation.  

Segregation of investments
Suppose a trader holds investment positions in equities and trades substantially identical securities positions in equities or equity options using TTS and Section 475. During a tax exam, an IRS agent could recharacterize trades as investments, or vice versa, whichever suits them best. For example, the IRS could reclassify an investment position in Apple equity currently deferred for long-term capital gains into Section 475 MTM ordinary income at year-end. Alternatively, the IRS could recharacterize Section 475 MTM ordinary losses on Apple options as capital losses triggering a $3,000 capital loss limitation.

Traders with overlap between investing and trading activity should consider ringfencing TTS/475 trading into an entity and conducting their investment activity on the individual level. That solution would fix the above potential IRS problem.

475 fixes wash sales with IRAs for TTS trades
If there is an overlap in what you trade in taxable accounts vs. what you invest in IRAs, the trader must avoid triggering permanent wash-sale losses throughout the year. Suppose a trader takes a loss in a taxable account and buys back a substantially identical securities position 30 days before or after in an IRA account. In that case, the wash-sale loss disenfranchisement becomes permanent.

To avoid such overlap, traders can fix this problem with a “do not invest” list. One strategy is to trade equities and equity options in taxable accounts and invest in ETFs, mutual funds, and REITs in IRAs. 

TTS traders can make a Section 475 election to do away with wash sales between taxable accounts and the IRAs, so overlap is not a problem.

Consider all IRA accounts for married filing joint, including traditional IRAs, Roth IRAs, rollover IRAs, and SEP IRAs. Don’t include qualified plans like 401(k) or solo 401(k) plans.

Most traders are unaware of the nuances of triggering permanent wash sales between taxable and IRA accounts. IRS rules for broker-issued 1099-Bs have a narrow view of wash sales; they call for wash-sale loss adjustments on “identical symbols” for the one account. Conversely, IRS wash sale rules for taxpayers have a broader view: Calculate wash sales on “substantially identical positions” (between equities and equity options) on all individual brokerage accounts, including IRAs. Consider using trade accounting software compliant with IRS wash-sale rules for taxpayers.

Section 475 is a consequential election for TTS traders with many advantages but first, consider personal circumstances and nuances.

Learn more about Section 475 in Green’s 2022 Trader Tax Guide.

If you seek advice on making a Section 475 election, consider a 50-minute consultation with us soon.

Traders Should Focus On Q4 Estimated Taxes Due January 18

January 10, 2022 | By: Robert A. Green, CPA | Read it on

Many traders have substantial trading gains for 2021, and they might owe 2021 estimated taxes paid to the IRS quarterly. Unlike wages, taxes aren’t withheld from trading gains. Others can wait to make tax payments until April 18, 2022, when they file their 2021 tax return or extension.

The first three quarterly estimated tax payments were due April 15, June 15, and September 15, 2021, and the quarter four payment is due on January 18, 2022. Many new traders didn’t submit estimated payments for the first three quarters, waiting to see what Q4 brings. Also, some traders view skipping estimated tax payments like a margin loan with interest rates of 3% for Q1 and Q2 2021. With full transparency at year-end, traders can better assess the payment they should make for Q4 payments to minimize their underpayment penalties and interest.

The safe-harbor rule for paying estimated taxes says there’s no penalty for underpayment if the payment equals 90% of the current-year tax bill or 100% of the previous year’s amount (whichever is lower). If your prior-year adjusted gross income (AGI) exceeds $150,000 or $75,000 if married filing separately, then the safe-harbor rate rises to 110%. 

Activity in Jan. 2022 can trigger wash sale losses for 2021, thereby creating more income in 2021.

Suppose your 2020 tax liability was $40,000, and AGI was over $150,000. Assume 2021 taxes will be approximately $100,000, and you haven’t paid estimates going into Q4. Using the safe-harbor rule, you can spread out the payment, submitting $44,000 (110% of $40,000) with a Q4 voucher on January 18, 2022, and paying the balance of $56,000 by April 18, 2022. This is an excellent option to consider instead of sending $90,000 in Q4 (90% of $100,000). Consider setting aside that tax money due April 18, 2022, rather than risking it in the financial markets in Q1 2022. I’ve seen some traders lose their tax money owed and get into trouble with the IRS. (See the example below). 

If your 2020 income tax liability is significantly higher than your 2021 tax liability, consider covering 90% of the current year’s taxes with estimated taxes. Check your state’s estimated tax rules, too.

In the above example, the trader should calculate the underpayment of estimated tax penalties for Q1, Q2, and Q3 on the 2021 Form 2210. Consider using Form 2210’s Annualized Income Installment Method if the trader generated most of his trading income later in the year. The default method on 2210 allocates the annual income to each quarter, respectively.

Learn more about estimated taxes at

A forewarning: The recent market-sell off in January 2022 reminds me of similar circumstances in a few prior years. Here’s an example of what to avoid in 2022. Joe Trader has massive capital gains taxes to pay for 2021. However, due to a market correction in early 2022 and being on the wrong side of many trades, Joe might incur significant capital losses in early 2022 in trading securities (equity options and equities). Unfortunately, Joe might lose much of the tax money he owes the IRS and state for 2021 taxes. Investors will get stuck with a $3,000 capital loss limitation in 2022 and must carry over capital losses to subsequent years. However, Joe is eligible for trader tax status (TTS), so he submits a 2022 Section 475 election to the IRS by April 18, 2022, for ordinary gain or loss treatment with mark-to-market accounting.

With Section 475, Joe’s 2022 trading losses are “ordinary” and offset his other 2022 income, like retirement plan distributions. However, the 2017 TCJA legislation has an “excess business loss” (EBL) limitation in 2022 of $540,00 (married)/$270,00 (other taxpayers). EBL over the limit becomes a net operating loss (NOL) carryforward, which offsets income of any kind in subsequent years. Unfortunately, TCJA doesn’t permit net operating loss (NOL) carrybacks for 2022. Before 2018, traders could carry back massive NOLs to replenish their trading capital and stay in business.

Traders and investors in futures contracts can consider a Section 1256 loss carryback election. Rather than use the 1256 loss in the current year, taxpayers may deduct 1256 losses on amended tax return filings, applied against Section 1256 gains only. It’s a three-year carryback; unused amounts carry forward. TCJA repealed most NOL carrybacks, so the 1256 loss carryback is a trader’s only remaining carryback opportunity.

Star Johnson, CPA, contributed to this blog post.

FIFO vs. Specific Identification Accounting Methods

December 1, 2021 | By: Robert A. Green, CPA | Read it on

By default, the IRS, brokerage firms, and most trade accounting programs use the First-In- First-Out (FIFO) accounting method for securities. If you sell security A, its cost-basis is the first lot purchased — the first one “out” or sold. FIFO suits most active day traders.

But there is another option called the Specific Identification (SI) accounting method. Assume you bought several lots of security A over the year while the stock increased in price. You might prefer to use SI accounting instead of FIFO to specify a higher cost-basis lot to reduce your short-term capital gains for 2021. This enables you to hold the older purchased stock for 12 months at a lower cost-basis for a long-term capital gain taxed at a lower rate (up to 20% for 2021 and 2022).

The IRS requires contemporaneous action for using SI. You must specify the lot to sell before executing the sale, and the broker must confirm those instructions in writing at that same time. You cannot decide to use SI after the sale’s settlement date, like when preparing your tax returns. The IRS provides a little leeway to correct communication errors with the broker by allowing a settlement date rather than a trade date.

FIFO is also widely used for cryptocurrencies. While SI is the default accounting method for intangible property, it’s challenging to operate with cryptocurrencies. See Frequently Asked Questions on Virtual Currency Transactions | Internal Revenue Service (

Don’t Miss The Election For The SALT Cap Workaround

October 5, 2021 | By: Robert A. Green, CPA | Read it on

Many states recently enacted “SALT cap workaround” legislation enabling pass-through entities (PTE) to deduct entity-level SALT payments as a business expense in place of non-deductible itemized deductions over the “SALT cap” of $10,000 per individual tax return. Currently, 20 states have enacted this legislation, and others are considering it.

The SALT cap workaround is not automatic in most states; the owner must file an election for PTE treatment by the deadline, which varies by state. The PTE election deadline for New York State is October 15, 2021. Connecticut’s pass-through entity (PTE) tax for the SALT cap workaround is mandatory, which is unique. In most states, the owner can make the election with a timely filed tax return, which is more convenient.

It’s also essential in most states to pay PTE estimated taxes. For a 2021 business expense deduction on the federal return, make the estimated tax payments before December 31, 2021.

See my updated blog posts on the SALT cap workaround below. As an excerpt, here are some of the updates for NYS and CA.

You can also search “SALT cap workaround” for your state. Several states published FAQs, and many local CPA firms have blog updates about it. 

This alert applies to pass-through entities (PTE), including LLCs, taxed as partnerships or S-Corps. It’s doesn’t apply to sole proprietors. For traders, the PTE must be eligible for trader tax status (TTS).

New York State

NYS Tax Department: New guidance and election application for optional pass-through entity tax (NYS Tax Dept, August 25, 2021) The New York State Tax Department has issued a technical memorandum and webpage to provide information on the new optional PTET.

New York State’s New Pass-Through Entity Tax – The CPA Journal (CPA Journal Aug. 2021)
“Election. To file and pay PTE tax, an eligible partnership or S corporation must make an irrevocable election by the first estimated payment due date, which is March 15 of the calendar year prior to the year in which the PTE tax return is required. The election is made annually and will be effective for the current taxable year. For the 2021 tax year only, an election must be made by October 15, 2021.”

NYS Tax Department: Deadline approaching to opt into pass-through entity tax (PTET) (NYS October 6, 2021)
“To opt-in: Log in to your S corporation’s or partnership’s Business Online Services account. (If the business doesn’t have an account, we recommend creating one by October 8 to avoid missing the election deadline.).”


SALT workaround elective pass-through entity tax (Spidell’s California Minute July 18, 2021)

Pass-through entity tax FAQs released by FTB (Spidell September 30, 2021)
“The FTB anticipates releasing the new pass-through entity tax voucher before December 2021. That voucher will provide instructions on how to make the elective tax payment going forward. Note that for federal purposes, the entities will only benefit from the reduction of net income on the 2021 K-1s if the payment is made before the end of the entity’s 2021 taxable year.”

Help with pass-through entity elective tax FAQs (FTB)
“A qualified entity must make the election on its original, timely filed return.” That means the 2021 PTE return due to be filed in 2022.

Other blog posts:

How to Deduct State and Local Taxes Above SALT Cap

Unlock State & Local Tax Deductions With A SALT Cap Workaround. See updates by state.