Category: 2025 OBBBA Tax Bill

2025 Year-End Tax Planning for Traders and Investors Under the OBBBA

October 8, 2025 | By: Robert A. Green, CPA | Read it on

Get ready for year-end with proactive tax planning for traders. The One Big Beautiful Bill Act (OBBBA) made many TCJA provisions permanent and extended valuable deductions for traders. Smart timing of income, PTET payments, and S-Corp benefits before December 31 can lower your 2025 tax bill and set you up for success in 2026.

Overview Introductory Note on Financial Product Tax Treatment

Every trader should understand how different financial instruments are taxed. Securities, futures, options, ETFs, ETNs, forex, digital assets, precious metals, and commodities are all subject to different tax treatments. This post includes a complete reference section later in the article detailing those distinctions.

Overview

Year-end is the best time for active traders to take control of their 2025 tax outcome. With significant changes under the One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, traders can capitalize on lower tax rates, wider brackets, and enhanced deductions made permanent from the 2017 Tax Cuts and Jobs Act (TCJA). Whether you’re using Trader Tax Status (TTS), the Section 475 mark-to-market (MTM) election, or traditional capital-gain treatment, proactive steps before December 31 can save thousands in taxes.

1. OBBBA Made TCJA Benefits Permanent

Note: 2025 thresholds verified under OBBBA; cross‑checked with multiple trusted tax publishers to ensure accuracy, as IRS pages may remain outdated.

Lower tax brackets preserved: The top individual rate remains 37%, avoiding the scheduled rise to 39.6%. Marriage penalty relief is available across most brackets.
Higher standard deduction: $15,750 single / MFS, $31,500 MFJ, and $23,625 HOH for 2025 (filed in 2026).
Qualified Business Income (QBI) deduction retained: Section 199A continues for traders with TTS and Section 475 income, subject to thresholds.
$40,000 SALT deduction cap: Extended for 2025 (with 1% annual indexing through 2029).
100% bonus depreciation: Permanently reinstated for qualifying assets placed in service after January 19, 2025.
Section 174A – Internal-Use Software Expensing: Domestic R&E expenses, including internal-use software, are fully deductible in the year incurred.

These provisions give traders and their pass-through entities a stable planning framework for years ahead.

2. The SALT Cap and PTET Strategy Still Matter

The $40,000 SALT cap doesn’t eliminate the advantage of Pass-Through Entity Tax (PTET) elections. PTET allows partnerships and S-corps to pay state tax at the entity level, making it fully deductible against business income for federal purposes—bypassing the SALT cap.

Action items:

Confirm or elect PTET before your state’s deadline.
Pay 2025 PTET installments by year-end to secure the deduction.
Coordinate your PTET with your QBI deduction and NIIT exposure to maximize overall benefit.

3. Capital Gains and Loss Harvesting Still Work

“Selling losers to offset winners” remains a core year-end move.

For active traders without Sections 475 or 1256 (futures):

Harvest losses to offset realized capital gains.
Use up to $3,000 of net capital loss to offset ordinary income.
Match long-term losses against short-term gains—taxed up to 37% plus 3.8% NIIT.

For Section 475 securities traders, wash-sale and capital-loss limitations are eliminated; ordinary losses can now offset all sources of income.

Investors must still comply with wash-sale rules under Section 1091, which disallow losses when substantially identical securities are repurchased within 30 days before or after the sale.

4. Avoid the Wash-Sale Trap

Under Section 1091, no loss is recognized if you reacquire substantially identical stock or securities within 30 days before or after the date of sale. This can occur across multiple brokerages or even IRAs. (IRA accounts on their own do not have wash sales.)

Warning: It’s a problem when you repurchase a losing trade from a taxable account in an IRA. That causes a permanent loss of the wash sale, whereas in taxable accounts, wash sales are merely deferred.

The IRS wash sale rules for brokerage firms are narrower and differ from the IRS rules for taxpayers, which are broader. Brokers report wash sales for each account based on identical securities. Conversely, taxpayers should report wash sales on all accounts on a combined basis, as well as on substantially identical securities. For year-end planning, consider using TradeLog to comply with the IRS wash sale rules for taxpayers.

Trader tips:

Close losing positions by mid-December to ensure 2025 loss recognition, and wait for the rest of the 30 days in January 2026 before repurchasing a substantially identical security. (“Break the chain” strategy.)
Turn off DRIPs before year-end.
Replace exposure with similar but not identical ETFs (e.g., sell SPY, buy SPLG). Each ETF has S&P 500 exposure, but they are not substantially identical.
Section 475 traders are exempt from wash sales.

5. Timing Income and Deductions Under OBBBA

Defer income to 2026 if possible—through timing of C-corp dividends, bonuses, or realized gains. (Partnership and S-corp distributions are generally non-taxable and don’t defer income.)
Accelerate losses and deductions into 2025 if you expect income to drop in 2026, capturing current-year savings while rates remain constant.
Bunch charitable or state-tax payments to exceed the higher standard deduction in alternating years, and itemize deductions. (The new above-the-line charitable deduction doesn’t apply until the 2026 tax returns.)

6. Section 475 and Trader Tax Status: Positioning for 2025 and Beyond

Although the Section 475(f) election for 2026 is filed with your 2025 return or extension (April 15, 2026, for individuals, March 15, 2026, for partnerships/S-corps), Q4 2025 is the time to evaluate your Trader Tax Status (TTS) and decide how Section 475 fits into your broader plan.

Consider using Green’s Trader Tax Status Qualification App

Why This Matters at Year-End

Under 475, all trading gains and losses become ordinary, eliminating the $3,000 capital-loss limit and wash-sale deferrals.
Staying under capital-gain treatment allows for loss harvesting and preferential long-term rates.
Once elected, 475 applies only while TTS is active; if TTS lapses, the mark-to-market method is suspended for the non-TTS period.

Assessing TTS Eligibility Before Year-End

TTS qualification determines whether you can deduct trading business expenses and apply Section 475 for 2025 (if you previously elected Section 475 on time).
If you cease active trading before year-end—for example, TTS stops after Q3—then Section 475 is suspended for Q4 2025, and trading after that point reverts to capital-gain treatment.

Maintain a consistent trading cadence through Q4 to preserve TTS for the entire year and keep Section 475 in effect without interruption.

If a trader wants to form a new entity for TTS and tax benefits, they should have created it before the start of Q4. Establishing an entity for only one quarter of the year is generally not enough time to safely demonstrate TTS eligibility or fully utilize related deductions and benefits.

Segregating Investments From Trading

Traders eligible for TTS and using Section 475 can also maintain separate investment positions, subject to capital gains taxation. To preserve this distinction and comply with IRS rules:

Use separate brokerage accounts for 475(f) trading vs. investments.
Avoid holding the same or substantially identical securities in both accounts.
If investments are held inside a 475 account, you must contemporaneously record each investment in your records on the day of purchase (e.g., in a trade log or journal). Without this same-day identification, the IRS may treat the position as a 475 trading position or bar a loss from using the 475 method.
Do not reclassify losing investments as trading positions later—a TTS trader cannot convert a losing investment position into a trading position to turn an unrealized capital loss into an ordinary loss. Such retroactive relabeling violates Section 475 and can trigger IRS adjustments and penalties.
Maintain documentation that demonstrates investment intent, more extended holding periods, and a reduced frequency of trading.
Report trading under Form 4797 and investments on Form 8949 / Schedule D.

This segregation ensures you retain the benefits of both worlds—ordinary-loss treatment for trading (and QBI deduction on Section 475 income), and preferential capital-gains rates for long-term investments.

Accelerating Expenses Under OBBBA

If TTS is strong in 2025 but uncertain for 2026, consider accelerating business expenses into 2025 to secure full deductions while TTS clearly applies. The One Big Beautiful Bill Act (OBBBA) strengthened TCJA’s bonus depreciation rules, allowing 100% expensing for most business equipment, computers, furniture, and software placed in service by December 31, 2025.

Other acceleration opportunities:

Prepay subscriptions, education, and trading-related services within the 12-month rule.
Upgrade trading workstations and technology before year-end to qualify for full expensing.
Pay professional and advisory fees (such as tax consultations or accounting software) by December 31 for the 2025 deduction.

7. The QBI Deduction: Preserve It With an S-Corp

The Section 199A Qualified Business Income (QBI) deduction continues after OBBBA and remains a valuable planning opportunity for traders with TTS who use the Section 475(f) method. The deduction equals up to 20% of qualified ordinary trading income, minus TTS expenses, and can lower the effective top rate from 37% to about 29.6% when applicable.

Phaseout thresholds (2025): The OBBBA made the Section 199A QBI deduction permanent but left 2025 thresholds unchanged. For tax year 2025, the existing SSTB limits remain in effect: $197,300 (single and other) and $394,600 (MFJ), with phaseouts ending at $247,300 and $494,600, respectively. Beginning in 2026, the OBBBA significantly expands these ranges, increasing the phaseout window from $50,000 to $75,000 for single filers and from $100,000 to $150,000 for joint filers. The income thresholds themselves will adjust for inflation in 2026. The law also introduces a new minimum QBI deduction of $400 for taxpayers with at least $1,000 of QBI from an active business, indexed for inflation starting in 2027.

Understanding QBI Mechanics for Traders

Within the phaseout range, an SSTB like a TTS trading business may qualify for a partial deduction based on the lesser of:
- 20% of qualified business income (QBI), or
- The greater of 50% of W-2 wages, or 25% of W-2 wages plus 2.5% of the unadjusted basis (UBIA) of qualified property.
Traders generally have little or no qualified property, so the 50% of W-2 wages test typically applies.
A TTS S-Corp can pay the owner W-2 wages, unlocking health insurance and retirement plan deductions, as well as potentially supporting a limited QBI deduction within the phaseout range.
Partnerships and sole proprietorships cannot pay the owner W-2 wages; however, they can include non-owner employee wages to satisfy the wage limitation test.

Planning Notes

Because trading is an SSTB, the QBI deduction phases out entirely once taxable income exceeds the upper threshold. For traders with taxable income inside the phaseout range, S-Corp wages can help optimize QBI benefits while preserving access to health insurance and retirement deductions.

8. Retirement and S-Corp-Level Planning

TTS S-Corp entities offer valuable benefits, including Solo 401(k) and SEP IRA contributions, as well as health insurance deductions. Make elective deferrals by December 31 and employer contributions by the filing deadline. Ensure S-corp payroll meets the wage base for both retirement limits and QBI optimization.

2025 Retirement Contribution Limits

Solo 401(k) elective deferral: $23,500 (employee contribution limit)
Catch-up contribution (age 50+): $7,500
SECURE 2.0 catch-up (ages 60–63): $11,250 (if plan allows)
Employer profit-sharing contribution: Up to 25% of W-2 wages, capped at $46,500.
Total contribution limit: $70,000 ($77,500 including catch-up)

S-Corp Advantage for Traders

Earned income: S-Corp officer compensation qualifies as earned income, allowing for deductions for health insurance and retirement plans.
Solo 401(k) deadlines: The plan must be established by December 31, 2025, with elective deferrals made by the end of the year. Employer contributions (profit sharing) are deductible through the S-Corp return due date, including extensions (generally September 15, 2026).
SEP IRA option: Simplified alternative; 25% of compensation up to the same annual limits. No elective deferrals or catch-ups. The Solo 401(k) requires less salary, resulting in savings on payroll taxes.
No “reasonable compensation” rule: A TTS S-Corp determines wages based on desired health insurance and retirement benefits, as well as QBI deductions in the phaseout range, rather than on general industry standards or the 25% to 50% of net income norm.

For more details, see GreenTraderTax Retirement Solutions.

9. New OBBBA Temporary Provisions Affecting Individuals

Temporary for tax years 2025 through 2028. For non-itemizers and itemizers.

Senior Deduction $6,000/year single, $12,000 MFJ. Age 65 or older. Phases out (MAGI) over $75,000 single or $150,000 MFJ.
Overtime Deduction capped at $12,500/ year single, $25,000 MFJ. Phases out (MAGI) over $150,000 single, or $300,000 MFJ.
Car-Loan Interest Deduction up to $10,000. Phases out (MAGI) over $100,000 single, or $200,000 MFJ.

Other OBBBA provisions are permanent.

Permanent 60% AGI limit for cash charitable gifts.
Estate & Gift exemption rises to $15 million in 2026—update estate plans.
Pease Limitation repealed—itemized deductions less restricted for high earners.

10. Year-End Example: Active Trader Couple

Scenario: Married TTS traders using an S-Corp, filing jointly

$550K Section 475 income (ordinary)
$50K long-term capital gains
$20K unrealized losses

Moves before December 31:

Elect PTET for S-Corp → $35K state tax deduction from gross income, unlocking full standard deduction on individual tax return.
Harvest (sell) $20K capital losses → offset against capital gains.
Contribute the maximum allowed $70K Solo 401(k) through S-Corp.
Health insurance deduction $25k through S-Corp.
Pay $186K W-2 salary → to maximize Solo 401(k) and also qualify for partial QBI deduction within the phaseout range.
Donate $10K cash → within 60% AGI limit. (Use standard deduction, which is higher)

Calculations:

Gross income = $580K (550k trading + 30k LTCG).
Deduct 130k = PTET ($35K) from gross income, Solo 401(k) ($70K) AGI deduction, ($25k) health insurance AGI deduction, Adjusted gross income = $450K.
Standard deduction ($31.5K) → taxable income ≈ $418.5K.
This keeps taxable income within the QBI phaseout range (starts $394.6K, ends $494.6K MFJ for 2025), allowing a partial QBI deduction.

Result: Taxable income reduced by ~$130K, enabling a limited QBI deduction, NIIT savings, and lower effective tax rate — demonstrating coordination of PTET, retirement, health, and capital loss harvesting. Payroll is the lever that counts, so find your sweet spot to unlock the most tax savings.

11. Final Checklist for December 31

Review YTD trading and investment gains/losses
Harvest capital losses and avoid wash-sales
Maximize state PTET through S-Corps and LLC/partnerships
Maximize health insurance and retirement contributions through an S-Corp
Execute S-corp payroll before the year-end
Confirm TTS status through year-end
Accelerate TTS expenses (100% expensing)
Schedule 2025 tax consultation

12. Tax Treatment of Financial Products: Detailed Reference

Every trader should understand how different financial instruments are taxed. Below is an expanded summary organized by the categories in the GreenTraderTax Tax Treatment Center and the “Explore Tax Treatment on Financial Products” section:

Capital Loss Carryovers: Capital losses offset capital gains and up to $3,000 of ordinary income ($1,500 if married filing separately). Unused losses carry forward indefinitely. Section 475(f) traders report ordinary losses that do not absorb capital-loss carryovers.

Securities: Stocks and narrow-based ETFs are subject to realization accounting, capital gains treatment, and wash-sale loss deferrals under Section 1091. Traders qualifying for TTS can elect Section 475(f) treatment for ordinary gain or loss, thereby avoiding wash sales and the $3,000 limitation. Report on Form 8949/Schedule D or Form 4797 if using Section 475.

Section 1256 Contracts (Futures, Broad-Based Index Options): Receive 60% long-term and 40% short-term capital gains treatment, regardless of holding period. Section 1256 contracts are marked-to-market at year-end, and losses may be carried back three years against prior Section 1256 gains (as reported on Form 6781). Traders can also opt for a mixed straddle treatment.

Options: Equity options are taxed as securities. Gains or losses are capital and depend on the holding period. Wash-sale rules apply to substantially identical options. Complex rules for straddles, constructive sales, and Section 1258 conversion transactions can defer losses or recharacterize gains. Options on futures are taxed the same as futures, which are Section 1256 contracts.

Exchange-Traded Funds (ETFs): Most ETFs are registered investment companies (RICs) taxed as securities. Commodity or futures-based ETFs may issue K-1s with Section 1256 gains, but for sales, they are treated like securities. Grantor-trust metals ETFs (e.g., GLD, SLV) are taxed as collectibles (28% maximum rate).

Forex: Spot and forward contracts default to Section 988 ordinary gain or loss treatment. Traders can elect out of Section 988 for specific contracts and into Section 1256(g) for capital-gains treatment, but elections must be made prospectively.

Cryptocurrencies and Digital Assets: See Digital Asset Trading Explained: Tax Rules for Crypto ETFs, Futures, Options, and Tokens. Digital assets are treated as property for federal tax purposes, rather than as currency. Traders must report sales and exchanges as capital transactions. Short-term and long-term capital gains apply based on the holding period. Mining, staking, and airdrops generate ordinary income at the time of receipt. Crypto futures on regulated U.S. exchanges qualify as Section 1256 contracts (60% long-term / 40% short-term). Wash-sale rules currently do not apply to crypto but may under future legislation. ETFs and ETNs holding digital assets follow their fund structure—RIC, grantor trust, or partnership. Proper recordkeeping is essential: use software or blockchain explorers to track cost basis, proceeds, and holding periods accurately.

Other Financial Products: This includes swaps, structured notes, CFDs, and foreign exchange derivatives. Most are subject to ordinary income treatment unless they qualify for capital gains under specific elections. See Other Instruments for detailed character and timing rules.

Volatility exchange-traded notes (ETN) are structured as “prepaid forward contracts” or “debt instruments.” The IRS does not consider an ETN prepaid forward contract a security, whereas ETN debt instruments are. Sales of ETN prepaid forward contracts use the capital gains realization method on sales. Because it’s not a security, ETN prepaid forward contracts (i.e., VXX) are not subject to wash-sale loss adjustments or Section 475 (if elected).

Short Selling: Short sales are not recognized until the position is closed. Gains are always short-term. Losses are also short-term, except in rare cases involving hedging or straddling. Shorting substantially identical securities may create constructive sales or defer losses.

13–26. Expanded Planning Topics

13. Excess Business Loss & NOL: $313k single / $626k MFJ 2025 thresholds; excess business losses (EBL) become NOL carryforwards with an 80% income offset limit in the subsequent years. (The 2026 amount is $256k single / $512k MFJ after changes from OBBBA. The 2026 limits are lower than for the 2025 tax year. That gap reflects a smaller COLA/inflation adjustment in 2026 than in 2025. OBBBA reset the baseline for EBL inflation indexing to the pre‑2017 period.)

14. Defer vs. Accelerate: Match timing to expected 2026 income shifts.

15. Roth IRA conversions: Pair with Section 475 losses to use brackets efficiently.

16. 0% LTCG: 2025 thresholds $48,350 single / $96,700 MFJ / $64,750 HOH.

17. NIIT: 3.8% surtax above $200k single / $250k MFJ / $125k MFS.

18. Business expenses: 100% expensing; $2,500 de minimis; investment expense suspension continues.

19. Estimated taxes: Pay Q4 by January 15, 2026; consider adding to withholding at year-end to avoid underestimated tax penalties. Consider paying state estimated taxes before December 31, 2025, to take advantage of the new $40k SALT cap. However, keep an eye on AMT for which SALT is not deductible.

20. Wash-sale tactics: Use a new 2026 entity to reset positions, which breaks the chain on 2025 wash-sale losses.

21. TTS & Section 475 ops: Timely elections; mid-year suspension planning. If you have a significant capital loss carryover going into 2026, consider the pros and cons of making a 475 election. See chapter 2 of Green’s 2025 (or 2026) Trader Tax Guide for decision-making rationale.

22. S-Corp benefits: W-2 pay, accountable plans, health & Solo 401(k) integration, PTET SALT cap workaround, and QBI phaseout ranges.

23. New entity setup for 2026: Form single-member LLC in Dec 2025. On January 1, 2026, add your spouse as a partner in a partnership or elect S-Corp treatment for 2026. Elect Section 475 within 75 days of inception (January 1, 2026) by internal resolution for the LLC/partnership or S-Corp. “new taxpayer” exception.

24. Straddles: Avoid constructive sale/receipt traps.

25. Charitable: Donate appreciated stock; 60% AGI limit.

26. Disaster relief: Monitor IRS/state relief, including extended payments and tax returns, plus tax loss benefits.

Conclusion

OBBBA locks in a favorable tax environment for traders—but timing, TTS qualification, entity strategy, and QBI management still separate the merely compliant from the truly optimized. Before December 31, review your positions, confirm elections, and fine-tune income levels to maximize deductions and minimize your tax liability.

Schedule Your 2025 Trader Tax Planning Consultation
The GreenTraderTax team at Green, Neuschwander & Manning, LLC, can help you navigate these changes and tailor a strategy for your trading business.
Book Now → greentradertax.com/services/consultations

Can a Trader Benefit from Qualified Small Business Stock (QSBS) Under Section 1202?

September 10, 2025 | By: Robert A. Green, CPA | Read it on

Executive Summary

Section 1202 of the Internal Revenue Code offers one of the most valuable tax breaks for investors: the ability to exclude up to 100% of capital gains on qualified small business stock (QSBS). The 2025 One Big Beautiful Bill Act (OBBBA) expanded these benefits by introducing tiered holding periods, raising per-issuer caps, and indexing limits for inflation. However, trading businesses — whether in securities, futures, options, or digital assets — are explicitly excluded from eligibility. Traders cannot benefit through their own C corporation. However, traders may still access QSBS benefits by investing in a qualified trade or business (QTB) startup personally, using gifting and estate planning strategies (which can multiply the per-taxpayer exclusion if done correctly), or rollovers under Section 1045 (where the original QSBS holding period “tacks on” to the replacement QSBS).

What is QSBS?

Section 1202 allows non-corporate taxpayers to exclude from federal tax up to 100% of the capital gain from selling QSBS if:

The stock was issued by a C corporation that is a Qualified Small Business (QSB).
The stock was acquired initially at issuance for cash, property, or services. Stock acquired from resale doesn’t count.
The taxpayer satisfies the required holding period.

Key 2025 updates and the “applicable date.”

Applicable date: On or after July 4, 2025 (the OBBBA enactment date). New rules apply to QSBS acquired on or after this date.
Post-7/4/2025 stock: 50% exclusion after 3 years, 75% after 4 years, 100% after 5 years.
Pre-7/4/2025 stock: Keeps the legacy 5-year rule (100% exclusion for post-9/27/2010 issuances).
Per-issuer cap: The greater of $15M (indexed after 2026) or a 10× basis (legacy $10M applies for earlier stock pre-7/4/2025).
Gross-asset limit: $75M for stock issued after July 4, 2025 ($50M for earlier issuances pre-7/4/2025).

Gross-asset test nuance: The aggregate gross-assets test is measured at the corporate level using tax basis: aggregate gross assets = cash plus the adjusted basis of other property. Section 1202(d)(2)(B) treats contributed property as having a basis equal to its fair market value at the time of contribution, and the test must be satisfied both immediately before and immediately after each stock issuance. Example: If a startup receives $30M cash and $19M FMV property, aggregate gross assets = $49M, qualifying under the pre-7/4/2025 legacy threshold of $50M. Once assets exceed the $50M or $75M threshold (depending on acquisition date), new stock issued after crossing that threshold will not qualify as QSBS.

Tax coordination notes: Excluded Section 1202 gains are not included in net investment income (Net Investment Income Tax – NIIT) and are not AMT preference items under current law. For partial exclusions, the excluded portion is still outside NIIT, and no AMT add‑back applies. The taxable (non‑excluded) portion of gain is subject to capital gains rates, generally 28% for Section 1202.

QSBS Key Limits Overview

Example: An investor purchases QSBS with a $2M basis. Ten years later, the shares are sold for $25M, producing a $23M gain. Because the 10× basis amount is $20M (10 × $2M), the investor can exclude $20M of gain — even though the $15M per‑issuer cap would otherwise apply — leaving $3M taxable.

Rule	Pre-7/4/2025 Stock	Post-7/4/2025 Stock (OBBBA)
Holding period	5+ years for exclusion	3 yrs = 50%, 4 yrs = 75%, 5+ yrs = 100%
Per-issuer cap	$10M (not indexed)	$15M (indexed after 2026)
10× basis cap	Available	Available
Gross-asset limit	$50M (at issuance)	$75M (at issuance, indexed after 2026)

Traders and the “Excluded Businesses” Rule

Section 1202 excludes certain types of businesses from QSBS eligibility, including investing, trading, financial services, banking, insurance, leasing, and similar activities. This means:

A proprietary trading business or hedge fund does not qualify as a QSB.
A trading partnership or fund, with or without trader tax status, cannot restructure into a C corporation and expect its shares to be QSBS.
Even algorithmic or high-frequency trading firms are excluded, because their principal asset is investment and or trading activity.

This exclusion applies regardless of corporate structure or tax reorganization.

Traders eligible for trader tax status (TTS) prefer spousal LLC/partnerships for a SALT cap workaround strategy, or an S corporation for deducting health insurance premiums and retirement plan contributions, and a SALT cap workaround. C corporations are unsuitable for traders eligible for TTS. (See my related blog post.)

Qualified Trade or Business (QTB) Overview

To qualify, a corporation must conduct an active qualified trade or business (QTB). Section 1202(e)(3) excludes:

Specified services: health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services.
Reputation/skill test: Businesses where the principal asset is the reputation or skill of one or more employees.
Financial/asset-based: banking, insurance, financing, leasing, investing, or similar businesses.
Other exclusions: farming, natural resource extraction, and hotels, motels, and restaurants.

Practice note: QTB exclusions overlap with Section 199A’s SSTB rules, and trading is also treated as an SSTB for Section 199A QBI purposes.

Where Traders Might Benefit

Personal Investments: Traders can acquire QSBS by investing in a QTB startup as an individual and holding shares for the required period.
Gifting & Trusts: The per-taxpayer, per-issuer exclusion can be multiplied by distributing QSBS to family members or irrevocable trusts, provided they each hold the stock directly and meet all technical requirements. Example: A founder with $15M of QSBS gain gifts shares to two adult children and an irrevocable trust. Each donee may claim up to $15M (or 10× basis) of exclusion on their pro-rata gains, effectively multiplying the family’s total federal exclusion well beyond $15M. Gift tax and valuation planning should be considered before making transfers.
Section 1045 Rollover: Rollover gains into new QSBS within 60 days; the original holding period “tacks on” to the replacement QSBS, allowing for eventual 100% exclusion once the combined period meets the requirement.

Handling Upfront Startup Losses

Begin by utilizing a pass-through entity (LLC/partnership, or S corporation) to leverage early losses, and then transition to a C corporation that issues QSBS before reaching the $75M limit.

State Tax Implications

Category	States	Notes
Full Conformity	NY, CT, DE, OH, VA, and many others	No state tax on excluded gains.
Non-Conforming	CA, PA, MS, AL	Must add back exclusion and pay full state tax.
Partial	HI, MA	HI allows 50% exclusion; MA taxes short-term QSBS gains at regular rates and offers reduced rates for long-term QSBS.
Recent Change	NJ (2026+)	Begins conforming in 2026.

Advisor Tip: Partial conformity states may impose restrictions or higher rates — check with a state tax advisor.

Final Takeaway for Traders

Trading businesses cannot benefit from QSBS. But traders can still capture Section 1202’s powerful tax savings through personal investments, gifting, and rollovers.

California Sidebar: California does not conform to Section 1202. Even fully excluded federal QSBS gains are taxed by California.

Disclaimer

Section 1202 QSBS strategies can offer extraordinary tax savings, but they are complex and closely scrutinized by the IRS. Consider consulting a tax attorney or CPA with deep experience in structuring and deploying Section 1202 strategies before acting.

Sources

Thomson Reuters Checkpoint §1202 (exclusions include investing, trading, financial services, asset management).
Frost Brown Todd LLP: Analysis of Section 1202 business exclusions and California nonconformity.
NSKT Global, KB Financial Advisors, Robert Hall & Associates: State conformity guidance.
IRC §1202, OBBBA (P.L. 119-21).

OBBBA Trader Tax Update: 2025 Law Secures Key Provisions for Traders

July 9, 2025 | By: Robert A. Green, CPA | Read it on

The One Big Beautiful Bill Act (OBBBA), passed in July 2025, delivers lasting clarity for traders and small business owners by locking in and expanding many tax reforms from the 2017 Tax Cuts and Jobs Act (TCJA). OBBBA makes permanent or extends favorable provisions that benefit traders eligible for trader tax status (TTS) and Section 475 mark-to-market (MTM) accounting.

Unless otherwise noted, all tax law changes and provisions discussed below are effective beginning in 2025.

TTS Rules and Section 475 MTM Unchanged

TTS qualifications and Section 475(f) election rules remain intact. The final OBBBA does not reference or alter Section 475(f), meaning the existing Section 475 mark‑to‑market election for traders remains unchanged under current law. In legislative drafting, if no changes are enacted, existing provisions continue to apply.

TTS traders benefit from the tax treatment of business expenses. (See Trader Tax Status: How To Qualify.) With a timely filed Section 475 election, TTS traders receive ordinary loss treatment, which avoids the $3,000 capital loss limitation and exempts them from wash sale loss adjustments on securities. Profitable TTS traders can treat Section 475 ordinary income as qualified business income (QBI), making it eligible for the 20% QBI deduction. TTS is claimed by assessment; no formal election is required. However, an election is necessary for Section 475 MTM accounting. Investors are not eligible for Section 475—only TTS traders can use it.

Section 475 election deadlines for 2025:

Individuals – April 15, 2025
Pass-through entities – March 15, 2025

If a deadline falls on a weekend or federal holiday, it is extended to the next business day, by IRS rules.

If you missed the 2025 deadline, consider applying for 2026 instead. Attach the 475 election to the prior year’s tax filing, either the full tax return or extension. A 2025 Form 3115 must be filed with the 2025 tax return in 2026 as the second step of the election process. New entities can elect Section 475 within 75 days of formation, and this internal election does not require Form 3115.

Excess Business Losses Now Permanent

The excess business loss limitation (EBL) under Section 461(l) is now permanent. For 2025, thresholds are $313,000 (single) and $626,000 (married), indexed for inflation. EBL affects TTS traders who deduct business expenses on Schedule C, elect and use Section 475 ordinary losses for trading, or receive pass-through ordinary losses. Excess business losses convert into net operating loss (NOL) carryforwards, which can offset income of any kind. This permanence rejects earlier proposals that sought to limit such offsets.

Net Operating Loss (NOL) Rules Remain Unchanged

NOL rules remain unchanged under OBBBA. TCJA NOLs continue to carry forward indefinitely and are capped at 80% of taxable income. No carrybacks are allowed after 2017, except under the CARES Act, which enables NOLs arising in 2018, 2019, or 2020 to be carried back up to five years. TTS traders using Section 475 have ordinary losses and business expenses that comprise NOLs.

Qualified Business Income (QBI) Deduction Made Permanent

The 20% QBI deduction under Section 199A is now permanent under OBBBA. QBI applies to TTS traders with Section 475 ordinary income, with pass-through entities or sole proprietorships. QBI excludes capital gains, interest, dividends, and foreign exchange transactions.

For 2025, the TCJA income threshold is $394,600 (married) and $197,300 (single), which is indexed for inflation. There is also a non-indexed phase-in, phase-out range of $100,000 (married) and $50,000 (single), subject to wages and property limitations. For 2026, the income threshold will be indexed for inflation. Additionally, OBBBA increases the 2026 phase-in, phase-out range to $150,000 (married) and $75,000 (single), which will be indexed for inflation from 2026. Beginning in 2026, OBBBA also introduces a minimum QBI deduction of $400 (indexed for inflation) for taxpayers with at least $1,000 of qualified business income.

For TTS traders, an S-Corp can utilize the phase-in, phase-out because it is subject to a wage limitation. Only TTS S-Corps pay wages to their owners, whereas partnerships and sole proprietor Schedule Cs cannot pay salaries to their owners.

Bonus Depreciation Fully Restored

100% bonus depreciation is permanently reinstated for qualifying assets placed in service after January 19, 2025. Eligible property includes most new or used tangible business assets with a recovery period of 20 years or less, such as computers, office equipment, furniture, and off-the-shelf software. These assets must be used predominantly for business purposes. Real estate and intangible assets, such as goodwill, are excluded.

For traders, this provision may apply to technology infrastructure used in trading businesses, including multiple monitors, trading computers, and certain types of licensed software.

Section 174A – Internal-Use Software Expensing

Domestic research and experimental (R&E) expenses are fully deductible in the year incurred, including costs for internal-use software. Foreign-developed software must be amortized over a 15-year period.

TTS traders building custom automated trading systems (ATS) benefit, but off-the-shelf ATS without significant customization by the trader may not. TTS requires trader involvement in the trades and self-creation of the ATS system; otherwise, the trader is classified as an investor, and TCJA denies investment expense itemized deductions.

Section 179 Expensing Expanded

The Section 179 limit increases to $2.5 million, with a $4 million phaseout, both indexed. It applies to business equipment and off-the-shelf software, but it cannot generate a loss.

Bonus Depreciation vs. Section 179

Bonus depreciation: No cap, can create a loss.
Section 179: Capped and limited to income.

Tip: Use bonus depreciation for large or loss-generating purchases.

SALT Cap Raised

The state and local tax (SALT) itemized deduction cap is increased to $40,000 for 2025 (up from $10,000), with a phaseout for high-income taxpayers. The cap rises to $40,400 in 2026 and then increases by approximately 1% annually through 2029, returning to $10,000 in 2030.

There is a phaseout of the increased SALT cap benefit for modified AGI above $500,000 (or $250,000 for MFS), adjusted upward annually. The cap is reduced by 30% of the excess income above that threshold:
Phaseout amount = 0.30 × (MAGI – $500,000)
For example, on a 2025 joint return with MAGI over $600,000, you will get the minimum $10,000 deduction.

The SALT deduction includes:

State and local income taxes
Real estate taxes on personal and certain investment property
Personal property taxes based on value (e.g., vehicle registration fees in some states)

Taxpayers may elect to deduct state and local sales taxes instead of income taxes, but not both. Foreign income taxes may also be deducted instead of claiming a foreign tax credit. The SALT deduction does not include federal taxes, Social Security or Medicare taxes, fines, or state business taxes like B&O tax or PTET, though PTET can be deducted at the entity level.

PTET Deduction Preserved

There is an IRS-sanctioned workaround to avoid the SALT cap, and OBBBA continues to allow its use. OBBBA preserves the full pass-through entity tax (PTET) deduction for pass-through business entities, including specified service trades or businesses (SSTBs), such as trading firms eligible for TTS.

PTET payments for state and local income taxes are deducted at the entity level as business expenses, with state tax credits flowing through to owners, reducing both regular tax and AMT income.

TTS traders using S-Corps or partnerships in states such as New York, California, New Jersey, and Connecticut can continue leveraging PTET elections to bypass the federal SALT cap. Thirty-seven states offer SALT cap workaround opportunities.

AMT Rules Preserved, SALT Still Disallowed

OBBBA permanently locks in the TCJA-era AMT exemption amounts, indexed for inflation. However, it does not change the disallowance of the SALT deduction for AMT purposes.

Even with the higher $40,000 SALT deduction under regular tax, SALT remains a preference item disallowed when calculating AMTI. This means high-income taxpayers subject to AMT may not benefit from the increased SALT cap unless their AMT exposure is otherwise reduced.

Using a SALT cap workaround in a pass-through entity, you can deduct state and local taxes as PTET rather than as a SALT itemized deduction that’s not deductible for AMT.

Wash Sale (WS) Rules & Crypto

No changes to WS rules on securities. Crypto remains exempt from wash sale rules under Section 1091, as it is not treated as a security for tax purposes.

Carried Interest Rules Unchanged

Carried interest retains its current long-term capital gain treatment, provided a three-year holding period is met.

Broker Reporting & Crypto

No changes to Form 1099-B. IRS Form 1099-DA for crypto remains set for 2026 implementation.

Senior Deduction and Retirement Highlights

New senior bonus deduction: $6,000 (single ) / $12,000 (married) through 2028, phased out starting at $75,000 / $150,000, not indexed for inflation.

Retirement plan rules remain unchanged.

Other Notable OBBBA Tax Changes

Standard deduction increase: Now approximately $15,750 (single) / $31,500 (married), indexed annually
Child tax credit: Increased to $2,200 per qualifying child
Trump Account: New birth-based custodial savings accounts with tax-deferred growth; annual contribution cap of $5,000 per child, indexed from 2027
QSBS exclusion: Increased from $10 million to $15 million
Auto loan interest deduction: Up to $10,000 on loans for U.S.-assembled vehicles; phased out over $100,000 / $200,000 AGI
Estate tax exemption: TCJA-level exemption of $13.6 million per individual extended through 2033; indexed to $15 million starting in 2026

Summary of Key OBBBA Tax Provisions

Provision	Effective Date	Expiration / Sunset	Notes
Section 475 MTM	2025	None	Remains unchanged; not mentioned in OBBBA
Excess Business Loss Limitation	2025	None	Made permanent; indexed for inflation
QBI Deduction	2025	None	Made permanent; phaseout thresholds indexed from 2026
Bonus Depreciation	Jan 19, 2025	None	Fully reinstated for qualifying assets
Section 179 Expensing	2025	None	Limit increased and indexed
SALT Cap	2025	2029 (reverts 2030)	Increased to $40,000; indexed; phaseouts for high income
PTET Deduction	2025	None	Preserved under OBBBA
Senior Deduction	2025	2028	$6,000 / $12,000; phaseout not indexed

Conclusion

OBBBA solidifies trader-friendly provisions, including trader tax status and Section 475 MTM, QBI deductions, bonus depreciation, EBL treatment, a higher SALT cap, and PTET SALT cap workarounds, as well as pass-through entity strategies. These reforms enhance tax certainty and planning for active traders.

Take Action: Plan Your 2025 Tax Strategy Today.

Don’t wait until the last minute to take advantage of the trader-friendly reforms in OBBBA. Whether you need help with Section 475 elections, TTS qualification, entity formation planning, or SALT workaround strategies, GreenTraderTax is here to guide you.

📅 Schedule a consultation
🧾 Download Green’s 2025 Trader Tax Guide
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Visit GreenTraderTax.com or call 888-558-5257 to get started.

Sources: Senate OBBBA text; IRS QBI FAQ; RSM US analysis; Forbes (Kelly Phillips Erb, July 4 & 5, 2025); Gibson Dunn summary; Yeo & Yeo analysis; KBKG commentary.

Author: Robert A. Green, CPA
GreenTraderTax.com

Darren Neuschwander, CPA, contributed to this blog post.