Category: Tax Compliance

Trader Tax Forms and Compliance: How to Report Securities, Futures, Forex, and Crypto

August 17, 2026 | By: Robert A. Green, CPA

Traders don’t report all their activity on one tax form. The correct reporting depends on the financial product, whether the taxpayer qualifies for trader tax status (TTS), whether the position belongs to a trading business or an investment portfolio, and whether elections such as Section 475 mark-to-market (MTM) or a Section 988 opt-out apply.

That complexity can lead to incorrect tax returns and IRS notices. Business expenses may appear on Schedule C, securities trades on Form 8949 and Schedule D, Section 475 ordinary gains and losses on Form 4797, futures on Form 6781, and digital-asset transactions on Form 8949.

Broker tax forms are only a starting point. Traders remain responsible for applying the correct taxpayer-level rules, elections, and accounting methods.

Which tax forms do traders use?

  • Sole-proprietor TTS business expenses: Schedule C
  • Securities without Section 475: Form 8949 and Schedule D
  • Securities with Section 475: Form 4797, Part II
  • Section 1256 contracts: Form 6781
  • Spot forex under Section 988: Schedule 1 or Form 4797
  • Cryptocurrencies and digital assets: Form 8949 and Schedule D
  • Trading partnerships: Form 1065 and Schedule K-1
  • Trading S corporations: Form 1120-S and Schedule K-1

TTS business expenses go on Schedule C

Most sole-proprietorship businesses report revenue and expenses on Schedule C. A sole-proprietor trader qualifying for TTS, however, reports only trading-business expenses on Schedule C. Trading gains and losses go on other tax forms.

Trading gains and losses generally are not self-employment income merely because the taxpayer qualifies for TTS.

This unusual reporting can confuse the IRS. A TTS trader’s Schedule C may show expenses but no revenue, while trading gains and losses appear on Form 8949, Schedule D, Form 4797, or Form 6781. The IRS may view the Schedule C activity as an unprofitable business even when trading gains exceed business expenses.

We recommend including tax-return footnotes explaining TTS qualification and why trading gains and losses are reported separately.

Securities without Section 475 use Form 8949 and Schedule D

Securities traders who have not elected Section 475 generally report securities sales on Form 8949, which feeds into Schedule D. In most individual cases, reporting is transaction by transaction unless an exception or permitted attachment method in the Form 8949 instructions applies.

These transactions receive capital gain-or-loss treatment. Capital losses are limited to $3,000 per year against ordinary income, with the balance carried forward. Capital losses are unlimited against capital gains. Wash-sale loss rules also apply.

The taxpayer is responsible for wash-sale reporting

Brokers generally calculate wash sales based on identical positions within a single brokerage account. Taxpayers must consider substantially identical positions across all their accounts, including joint accounts, spousal accounts, and IRAs.

A trader may be able to rely more confidently on Form 1099-B in a narrow situation involving one brokerage account, equities only, and no trading activity in IRAs. Other traders may need tax-compliant trade-accounting software or professional assistance.

Wash sale loss rules are complicated for active securities traders, so see our upcoming blog post series on wash sales.

Partnerships and S corporations may summarize Form 8949

Partnerships and S corporations may qualify for summary reporting under a special entity provision in the Form 8949 instructions.

Generally, an entity filing Form 1065 or Form 1120-S with more than five transactions in the applicable part of Form 8949 may report combined totals using “Available upon request” in column (a) and code M in column (f), without attaching every transaction.

This reporting privilege comes from the Form 8949 entity rule—not from TTS. The entity must maintain complete transaction-level records, properly calculate wash-sale losses and other adjustments, and make its records available if requested.

Section 475 securities use Form 4797

TTS traders who timely elect and use Section 475 MTM for securities report their covered business trading gains and losses as ordinary gains or losses on Form 4797, Part II.

Section 475 requires open covered business positions to be marked to market at year-end. It also avoids the $3,000 capital-loss limitation and wash-sale loss rules for those positions.

Section 475 is not automatic merely because a trader qualifies for TTS. TTS is determined based on the taxpayer’s trading activity. Section 475 requires a timely election and, for an existing taxpayer, an accounting-method change, when required, using Form 3115. Late Section 475 elections generally are not allowed. 

Form 4797 requires transaction details

Form 4797 shows summary amounts, but the Form 4797 instructions require an attached statement in the same format as line 10 detailing each transaction. Securities or commodities held and marked to market at year-end must be separately identified. Enter “Trader—see attached” in column (a) of line 10 and report the totals from the statement in columns (d), (f), and (g).

Segregate investment positions

Section 475 applies to covered business trading positions, not to properly identified investments.

Investment positions should be segregated from the trading business and clearly identified in the trader’s records before the close of the day they are acquired, originated, or entered into. The identification should establish that the position is unrelated to the trading business.

Properly segregated investments retain capital gain-or-loss treatment and remain reportable on Form 8949 and Schedule D.

A Section 475 trader or entity may therefore use both reporting methods:

  • Section 475 business trades go on Form 4797 with the required transaction-detail statement.

  • Properly identified investments go on Form 8949 and Schedule D.

  • Investments held by a qualifying partnership or S corporation may be eligible for the Form 8949 entity summary-reporting rule.

Section 1256 contracts use Form 6781

Section 1256 contract traders—including many futures traders—report their aggregate annual gain or loss on Form 6781, Part I.

These contracts generally receive 60/40 capital-gains treatment: 60% is treated as a long-term capital gain or loss, and 40% is treated as a short-term capital gain or loss, regardless of the holding period. Open contracts are marked to market at year-end, and wash-sale rules do not apply.

Section 1256 traders generally do not use Form 8949 for these contracts. They typically rely on Form 1099-B showing the aggregate profit or loss on contracts.

Many futures traders do not elect Section 475 for commodities because they prefer Section 1256’s 60/40 capital-gains treatment. Traders who properly elect Section 475 for commodities or futures report covered business trading gains and losses on Form 4797 instead.

Section 1256 loss carrybacks

An eligible individual with a qualifying net Section 1256 loss may elect to carry it back three tax years, applying it only against net Section 1256 gains in those years.

Make the election by checking box D, “Net section 1256 contracts loss election,” and entering the carryback amount on Form 6781. An eligible individual generally claims the carryback using Form 1045 or Form 1040-X, with amended Forms 6781 and Schedules D for the applicable years.

Corporations, estates, and trusts cannot make this carryback election. Partnerships and S corporations generally pass Section 1256 gains and losses through to their owners. The carryback election, if available, is made on the eligible individual owner’s return.

Forex reporting depends on the contract and elections

Forex tax treatment depends on the instrument, the default Section 988 rules, and whether the trader made a contemporaneous opt-out election.

Spot forex transactions receiving ordinary gain-or-loss treatment under Section 988 are generally reported on Schedule 1 for investors and Form 4797, Part II, for TTS traders.

Currency futures and certain major currency contracts may fall under Section 1256 and Form 6781. Capital gains and losses reporting may apply when a trader makes a contemporaneous election to opt out of Section 988. Forex generally uses summary reporting.

Large Section 988 losses may require Form 8886

A gross Section 988 foreign-currency loss of at least $50,000 in a single tax year for an individual or trust may be a reportable loss transaction requiring Form 8886, Reportable Transaction Disclosure Statement. This threshold can also apply when the loss passes through from a partnership or S corporation.

Because penalties for missing a required Form 8886 can be significant, traders with large forex losses should review the reportable-transaction rules before filing.

Digital assets bring new Form 1099-DA reporting

Sales and exchanges of cryptocurrencies and other digital assets generally are reported on Form 8949 and Schedule D.

Brokers began using Form 1099-DA to report gross proceeds from digital-asset sales effected during 2025. For 2025 sales, brokers were generally not required to report the cost basis.

For sales after 2025, brokers generally must report basis for covered digital assets acquired after 2025. Basis reporting for noncovered digital assets generally remains voluntary.

Form 1099-DA does not relieve the taxpayer of responsibility for determining the correct basis, holding period, gain or loss, and for reporting on Form 8949. Traders should reconcile Forms 1099-DA with their own digital-asset records.

Current federal wash-sale rules generally do not apply to spot cryptocurrency because it is not treated as stock or securities for this purpose. Tokenized instruments or digital-asset products that are themselves stocks, securities, or security-based derivatives require separate analysis.

Section 475 ordinarily does not apply to spot cryptocurrency itself. The IRS has not issued definitive guidance on whether cryptocurrency qualifies as a ‘commodity’ eligible for a trader’s mark-to-market election under Section 475(e) or (f), so this remains a developing area. See our blog post series on digital assets at https://greentradertax.com/category/cryptocurrencies/. 

Broker forms are not always the final tax answer

Forms 1099-B and 1099-DA are important starting points, but brokers issue them under broker-reporting rules. They do not know all the taxpayer’s accounts, tax elections, TTS position, investment identifications, or other relevant facts.

Traders should reconcile broker reports with:

  • Tax-lot accounting records

  • Taxpayer-level wash-sale calculations

  • Section 475 elections and year-end MTM adjustments

  • Section 988 elections

  • Digital-asset basis and holding-period records

  • Properly segregated investment positions

Entity returns can provide cleaner reporting

A trading partnership files Form 1065, while a trading S corporation files Form 1120-S. Each entity issues Schedule K-1s to its owners.

Entity returns consolidate trading gains, losses, and business expenses into a single return. Portfolio income, capital gains and losses, Section 475 ordinary gains and losses, and business expenses retain their applicable tax character when passed through.

An entity is not a substitute for TTS. The trading activity conducted within the entity must independently qualify as a trading business. Forming an entity does not convert investment activity into a TTS business.

Section 475 election procedures are strict

Section 475 does not have a stand-alone IRS election form.

An existing taxpayer generally makes a Section 475 election by the original due date—without extensions—of the prior-year return. Attach the election statement to the return if filed by that date or to a timely extension request. The taxpayer later perfects the accounting-method change by filing Form 3115 with the election-year return when required.

An existing taxpayer changing from the realization method to Section 475 generally must calculate a Section 481(a) adjustment as of the first day of the election year. The adjustment accounts for unrealized gains and losses on open covered business securities positions held at the end of the preceding year.

A newly formed entity that is a new taxpayer generally adopts Section 475 internally in its books and records within two months and 15 days after the beginning of its election year—often described as within 75 days of inception. A new taxpayer adopting Section 475 from inception generally does not file Form 3115 because it is not changing from a previous accounting method.

Traders should retain reliable, date-stamped proof of timely elections.

Section 475 revocations can be difficult

Under current IRS procedures, revoking a Section 475 election within five tax years of making it generally requires a non-automatic accounting-method change, IRS consent, and payment of the applicable user fee.

Traders should consider the potential difficulty and cost of revocation before making the election.

Alternatively, if a trader actually ceases to qualify for TTS, Section 475 is suspended during the nonqualification period without a formal revocation. If the trader later requalifies for TTS, the existing Section 475 election generally applies again. This is not an elective switch: the suspension must be supported by a material change in the taxpayer’s trading activity and facts.

Common IRS notice triggers

Common compliance and IRS-notice issues for traders include:

  • Schedule C showing business expenses but no trading revenue, which looks like a losing business

  • Schedule C improperly showing trading gains and losses

  • Form 8949 differing from Form 1099-B because taxpayer wash-sale rules differ from broker rules

  • Digital-asset proceeds on Form 1099-DA that are not reconciled with Form 8949

  • Missing Form 4797 transaction-detail statements

  • Section 475 ordinary losses reported without a timely election

  • Large Section 988 losses filed without reviewing the Form 8886 requirement

  • Failure to identify and segregate investments from a Section 475 trading business

Include tax-return footnotes

We recommend that business traders include tax-return footnotes explaining:

  • How the taxpayer qualifies for TTS

  • Whether the taxpayer timely elected Section 475

  • Whether the taxpayer elected to opt out of Section 988

  • How investment positions were identified and segregated

  • Why Form 8949 differs from Forms 1099-B or 1099-DA

  • How taxpayer-level wash-sale adjustments were calculated

  • Any other significant tax-treatment or reporting positions

Well-prepared footnotes can address potential IRS questions before they result in a notice or examination.

The bottom line

Traders do not use one universal tax form. Product type, TTS qualification, tax-treatment elections, accounting methods, and entity structure determine the reporting path.

Mistakes involving Section 475 elections, wash-sale calculations, investment segregation, or missing disclosures can be costly. Traders should address these issues before tax preparation begins and retain detailed records supporting their reporting positions.

For more information, see Green’s Trader Tax Guide. See Chapter 6, “Trader Tax Return Reporting Strategies.”

Tax laws and reporting rules change, and these strategies may not fit every trader. Consult a qualified tax professional regarding your facts.

Tax Extensions 2025: 12 Tips to Save You Money by April 15, 2026

March 17, 2026 | By: Robert A. Green, CPA

Tax season can be stressful, especially for traders and investors with complex reporting. Filing a tax extension is often a strategic move—not a red flag—that provides more time for accuracy and planning.

What’s new for the 2026 tax season

  • The April 15, 2026, deadline falls on a Wednesday (no holiday-related extension).

  • IRS enforcement continues to focus on late-payment penalties and underpayment compliance.

When it makes sense to file early

Reasons to file early include faster refunds, financing needs, identity theft protection, tax certainty, and avoiding extension risks.

Key deadlines

The federal income tax filing deadline for 2025 returns is April 15, 2026. Taxpayers can request an automatic six-month extension to file by submitting Form 4868 by April 15, extending the filing deadline to October 15, 2026. However, an extension only applies to filing—not payment—so taxes owed must still be paid by April 15, 2026, to avoid penalties and interest.

Tip #1: Consider filing an extension

Filing an extension gives you additional time to gather complete and accurate information, reducing the risk of errors.

Ways to file Form 4868:

  • E-file through your tax software or tax professional

  • IRS Direct File / IRS.gov account (ID.me verification)

  • IRS Free File (if eligible)

  • Pay your balance due online (IRS Direct Pay, EFTPS, or credit/debit card) and indicate it’s for an extension—this can count as filing Form 4868

  • Mail a paper Form 4868 to the IRS (required if attaching a Section 475 election statement)

Trader-specific note: Traders and investors frequently benefit from extensions due to late or corrected Forms 1099-B, partnership K-1 delays, and wash sale adjustments. Filing early with incomplete data often leads to amended returns.

Timing reminder: Do not wait until the final 30 days before April 15 to engage a CPA or organize your tax information. Most firms impose internal deadlines and will require an extension if materials are submitted too late.

Tip #2: Pay what you owe

Even if you file an extension, you should estimate and pay your tax liability by April 15, 2026.

To minimize penalties, taxpayers can rely on IRS safe-harbor rules—generally paying 100% of their prior-year tax liability (110% for higher-income taxpayers).

Strategic overpayment approach:
If you are profitable in Q1 2026—particularly with trading gains—consider conservatively overpaying your extension estimate. Excess payments can be applied toward 2026 estimated taxes, creating a buffer against income volatility and underpayment penalties.

Tip #3: Avoid rushing your return

Filing prematurely with incomplete or estimated data increases the likelihood of errors and amended returns. An extension provides time to ensure accuracy, especially for complex returns.

Audit myth clarification: Filing early does not reduce the risk of an IRS exam. In some cases, early-filed returns—particularly those claiming refunds—may receive additional scrutiny as the IRS processes returns early in the season.

Tip #4: Make IRA and HSA contributions

You can still make IRA and HSA contributions for the 2025 tax year up until April 15, 2026. Extensions do not extend this deadline.

SEP IRA and Individual 401(k) profit-sharing plans can be contributed up until the due date of the extended return, October 15, 2026.

Tip #5: Stay on top of estimated taxes

Filing an extension does not delay your 2026 estimated tax obligations. First-quarter 2026 estimated tax payments are still due April 15, 2026.

Additionally, check your resident state’s tax extension rules and safe harbor requirements. State rules vary widely—some require a separate extension filing, while others grant automatic extensions only if no tax is due.

Tip #6: Understand penalties

  • Late filing penalty: up to 5% per month (maximum 25%)

  • Late payment penalty: 0.5% per month (maximum 25%)

Interest accrues on unpaid balances regardless of extension status. The IRS currently charges 8% interest (compounded daily) on underpayments, making it costly to underpay even if you file an extension.

Always file the extension—even if your estimate is rough, or you can’t pay in full: It is critical to file Form 4868 on time, even if your calculation of tax due is imprecise or you cannot pay the full amount. Filing the extension avoids the much higher late-filing penalty (5% per month for up to five months). By comparison, the late-payment penalty of 0.5% per month is more comparable to the cost of a margin loan.

Tip #7: Why extensions are especially important for traders

Traders often receive corrected or delayed reporting well after April, including:

  • Corrected Forms 1099-B from brokers

  • Wash sale adjustments across accounts

  • Partnership and fund K-1s

Filing on extension helps avoid inaccuracies and reduces the need for amended returns.

Additional trader-specific considerations:

  • Wash sale reconciliation: Brokers report wash sales on a per-account basis, but traders must reconcile wash sales across all accounts, including IRAs.

  • Multiple broker coordination: Traders using multiple brokers often encounter inconsistent or corrected 1099-B reporting.

  • Departures from 1099-B reporting: Brokers may classify options as securities, while certain positions may qualify for Section 1256 treatment. Additionally, 1099-Bs do not reflect Section 475, requiring traders to use trade accounting solutions.

  • Capital loss carryforwards: Verify prior-year capital loss carryforwards, which are often misstated or overlooked.

  • Entity coordination: Align S-Corporation or partnership K-1 reporting with individual returns.

  • State tax considerations: Address multi-state activity, residency changes, and differing state extension rules.

  • Section 1256 vs. Section 475 review: Evaluate tax treatment of trading activity for future planning.

  • Audit risk reduction: Use the extension period to strengthen documentation and support tax positions.

Tip #8: Section 475 timing reminder

The deadline for a 2026 Section 475 mark-to-market election for individuals is April 15, 2026. It is now too late to elect Section 475 for the 2025 tax year.

For entities, the deadline was March 15, 2026, for S-Corporations and partnerships. Extensions do not extend Section 475 election deadlines.

How to file the Section 475 election with an extension:
It is not possible to e-file a tax extension with a Section 475 election statement attached. You must print Form 4868 (2025 federal extension) from your tax software, attach the 2026 Section 475 election statement, and mail the extension with the election to the IRS by April 15, 2026.

You can still e-file your entire 2025 tax return either before or after the extension deadline.

Second step — Form 3115 timing:
After making a timely Section 475 election, the second step is to file Form 3115 (Application for Change in Accounting Method). This is filed with your timely filed tax return (including extensions), not with the extension itself.

For example, a 2025 Section 475 election due April 15, 2025, requires a 2025 Form 3115 filed with the 2025 tax return by the extended due date of October 15, 2026—provided you filed a valid extension by April 15, 2026. Form 3115 is not required by the April 15 deadline.

For the election statement and additional guidance, see Green’s 2026 Trader Tax Guide (Chapter 2: Section 475 MTM).

Tip #9: Use the extension for better planning

An extension provides time to implement tax strategies, review financial data, and coordinate with advisors.

It provides an additional six months to assess tax positions in light of new interpretations of tax law, court cases, IRS memorandums, and other evolving guidance.

Tip #10: Reduce the need for amended returns

Extensions help ensure all information is complete before filing, minimizing the need for amendments.

Tip #11: Keep proper documentation

Use the extension period to gather and organize all supporting documents for your return.

Tip #12: Work with a qualified tax professional

Complex returns benefit from professional guidance, especially for traders and high-income taxpayers.

Most reputable CPA firms are extremely busy during tax season and may be short-staffed, particularly due to changes in the new tax law. It is generally a mistake to pressure a CPA to complete a return at the last minute (often the final ~30 days before April 15).

Many firms enforce internal deadlines for submitting tax information; if those are missed, they will require clients to file an extension.

Conclusion

In a year with evolving tax rules, filing an extension is not just about convenience; it’s a strategic decision that allows for more accurate reporting and better tax planning. For traders in particular, extensions provide critical time to address complex reporting issues, plan for upcoming elections, including Section 475 for 2026, and implement strategies aligned with new tax law developments.

Filing an extension is often the most strategic move for traders—providing time to improve accuracy, plan, and achieve better tax outcomes.

Trader Tax Return Reporting Strategies: How Active Traders Optimize Tax Savings and Reporting

January 29, 2026 | By: Robert A. Green, CPA

Accurate tax reporting is one of the most overlooked opportunities for active traders to optimize tax results. While compliance matters, the real value of proper reporting lies in unlocking tax savings through Trader Tax Status (TTS), Section 475 mark-to-market (MTM), Qualified Business Income (QBI), the SALT cap workaround, and favorable tax treatment for different trading instruments.

Active traders face reporting challenges that investors do not. High trade volume, multiple brokers, complex instruments, and special tax rules mean that how trading activity is reported directly affects tax outcomes. This article explains how trader tax reporting works, how different elections and instruments drive tax savings, and how traders can align reporting with their overall tax strategy.

Why Trader Tax Reporting Is Fundamentally Different

Trader tax reporting differs from investor reporting in several important ways:

  • Traders often execute thousands of trades per year

  • Income may be ordinary or capital, depending on elections and instruments

  • Futures and certain options follow mandatory mark-to-market rules

  • Wash sale rules apply differently—or not at all—depending on the facts

  • Broker Forms 1099-B frequently do not reconcile with proper tax treatment

These factors make trader reporting far more complex than simply importing broker data into tax software—and far more impactful when done correctly.

Trader Tax Status (TTS) and Schedule C Reporting

Qualifying for TTS is the gateway to most trader tax benefits, including business expense deductions, Section 475 elections, and entity-level planning.

Before addressing Section 475, traders must first assess and substantiate Trader Tax Status (TTS). TTS is a facts-and-circumstances determination based on trading frequency, volume, average holding period, intent, time devoted, and other factors. See Green’s Trader Tax Status Qualification App.

Once TTS is established, traders may deduct ordinary and necessary business expenses related to their trading activity on Schedule C. These expenses can include bonus depreciation on trading equipment, software, data services, home office expenses, margin interest, and professional fees. See the detailed list of trading business expenses at GreenTraderTax.com.

Importantly, trading gains and losses do not go on Schedule C. Schedule C is used to deduct business expenses. Trading income and losses are reported elsewhere depending on elections and instruments:

  • Form 8949 for securities and property (including cryptocurrencies) feeds into Schedule D. Form 8949 uses the realization method for short- and long-term capital gains and losses; long-term rates are 0%, 15%, and 20%. 

  • Form 4797 for Section 475 mark-to-market (MTM) ordinary income or loss on securities. As a business ordinary loss, it’s subject to Form 461 excess business loss (EBL) limits before moving the allowed loss on Schedule 1 (Form 1040). Amounts over EBL limits are an NOL carryforward.

  • Form 6781 for Section 1256 contracts, including futures on a U.S. qualified board or exchange (QBE). 60/40 capital gains treatment is applied on Form 6781, which then feeds into Schedule D. Section 1256 contracts are MTM, so wash sale losses don’t apply. A taxpayer may elect to carry back a Form 6781 loss three years against prior Section 1256 income. See a list of Section 1256 contracts in the GreenTraderTax Center.

Trader Reporting Regimes at a Glance

Category Investor Trader with TTS (No 475) Trader with TTS + Section 475
Primary Activity Investing Active trading Active trading
Business Expenses Not deductible Deductible on Schedule C Deductible on Schedule C
Trading Gains/Losses Capital Capital Ordinary
Reporting Forms Forms 8949 & 6781 → Schedule D Forms 8949 & 6781 → Schedule D Form 4797
Wash Sale Rules on securities Apply Apply Do not apply
Loss Limitation $3,000 capital loss limit $3,000 capital loss limit

No capital loss limit (subject to EBL rules)
Year-End MTM No No Yes (mandatory)

Excess Business Loss (EBL) Rules and Net Operating Losses (NOLs)

An important consequence of Section 475 mark-to-market (MTM) treatment is that trading losses become ordinary business losses, which are subject to the Excess Business Loss (EBL) rules under IRC §461(l).

How EBL Rules Apply to Traders

2025 EBL Thresholds

  • $313,000 for single filers and other non-joint filing statuses

  • $626,000 for married filing jointly

This does not mean that Section 475 trading losses are limited against Section 475 trading gains. The Excess Business Loss rules apply only after netting all business income and losses. An EBL arises only if total net business losses exceed the annual EBL threshold, regardless of whether those losses come from one trading business or multiple businesses. 

  • Section 475 MTM trading losses and trading expenses are business losses for EBL purposes

  • Capital gains and capital losses are not subject to EBL and remain subject to the $3,000 capital loss limitation

  • EBL amounts over the threshold are recharacterized as Net Operating Losses (NOLs)

This distinction is critical: traders with large Section 475 losses may face EBL limitations and NOL carryforwards, while capital-loss traders remain constrained by the $3,000 annual limit.

How NOL Carryforwards Work

  • Disallowed EBL amounts become NOL carryforwards

  • NOLs generally offset up to 80% of taxable income in future years

  • NOLs provide future relief but not a full current-year deduction

Qualified Business Income (QBI) and Section 475 Trading Income

Section 475 ordinary trading income may qualify for the Qualified Business Income (QBI) deduction under IRC §199A.

  • Trading businesses are treated as Specified Service Trades or Businesses (SSTBs), meaning the QBI deduction phases out above taxable income thresholds

  • W-2 wage and property limits and taxable income caps apply in the phase-out range.

  • QBI is computed on net business income after expenses

Coordination with EBL and NOL rules is essential when modeling a Section 475 election.

See 2025 Year-End Tax Planning for Traders and Investors Under the OBBBA, number 7. The QBI Deduction: Preserve It With an S-Corp.

Traders With and Without Section 475 Mark-to-Market

Traders Without Section 475

  • Securities reported on Form 8949 and Schedule D

  • Wash sale rules apply across all taxable accounts

  • Capital losses limited to $3,000 per year, with carryforwards

Traders With Section 475 MTM

  • Gains and losses are ordinary income or loss

  • Reported on Form 4797, not Schedule D

  • Year-end mark-to-market is mandatory

  • Wash sale rules do not apply

Even with a valid Section 475 election, traders should not report trading income on Schedule C, which commonly triggers IRS notices.

Wash Sale Calculations: IRS Taxpayer Rules vs. Broker Reporting

IRS wash sale rules (WS) apply at the taxpayer level, while broker reporting operates at the account level.

Brokers adhere to the narrower wash-sale rules required under IRS broker-reporting regulations.

IRS WS Rules for Taxpayers

  • IRC §1091 wash sale rules apply exclusively to stocks, securities, and related options or contracts to acquire them, prohibiting loss deductions if a “substantially identical” position is acquired within 30 days before or after the sale. This rule generally does not apply to commodity futures contracts, foreign currencies, or traders using Section 475 mark-to-market accounting. IRC §1091 states, “For purposes of this section, the term “stock or securities” shall, except as provided in regulations, include contracts or options to acquire or sell stock or securities.” This is why equity options are included in wash sales, but commodity futures are excluded.

  • Aggregate all taxable accounts (including IRAs). (IRA accounts on their own do not have wash sales.)

  • Apply wash sales across substantially identical securities

  • Track replacement shares or equity options and adjust basis

Broker 1099-B Reporting

  • Limited to a single account

  • No cross-broker aggregation

  • Simplified definitions of identical securities

As a result, broker-reported wash sales are often incomplete for active traders.

Example 1: A trader sells 100 shares of Apple stock at a loss at Broker A and repurchases 100 shares of Apple stock within 30 days at Broker B. No broker flags a wash sale, but the IRS rules require deferral of the loss. Otherwise, it would be too easy to game the system.

Example 2: A trader sells Apple shares and, within 30 days, purchases Apple equity options. That’s a wash sale because shares and equity options are substantially identical positions. No broker flags a wash sale, but the IRS rules require deferral of the loss under the taxpayer’s rules.

TradeLog Software

TradeLog aggregates multi‑broker data and applies IRS‑compliant wash‑sale logic based on taxpayer rules (not broker rules), generating Form 8949, 4797, and 6781 reports for active traders.

Futures, Options, and Section 1256 Reporting

Section 1256 contracts are reported on Form 6781 and receive 60/40 capital gain treatment with mandatory year-end mark-to-market (MTM). Because of this built-in MTM regime, wash sale rules do not apply to futures and other Section 1256 contracts. In addition, the IRC §1091 wash sale rule applies only to stocks and securities—not to commodity futures. 

Traders with Trader Tax Status (TTS) may also elect Section 475 on commodities (including futures). However, doing so converts Section 1256 gains and losses from 60/40 capital treatment to ordinary income or loss, eliminating the preferential tax rates. At the maximum tax bracket for 2025 and 2026, the blended 60/40 rate is 26.8% — 10.2% lower than the highest regular bracket of 37%.

In most cases, retaining Section 1256 treatment is the wiser choice for futures traders because the lower blended 60/40 tax rates often outweigh the benefits of ordinary gain or loss treatment under Section 475.

However, if the futures trader incurs a massive trading loss in Q1 2026, they should consider a Section 475 election by April 15, 2026, to ensure ordinary loss treatment and avoid a capital loss limitation. This is one of the few situations in which electing Section 475 for commodities may be advantageous.

SALT Cap and the PTET Workaround

Active traders should understand how the State and Local Tax (SALT) deduction cap interacts with trader reporting and entity structures.

  • The individual SALT itemized deduction cap is temporarily increased to $40,000 for tax years 2025 through 2029, and is scheduled to revert to $10,000 in 2030 unless extended by Congress. The cap increases by 1% per year; for 2026, it’s $40,400

  • This cap applies only at the individual level and affects traders who itemize deductions.

  • The Pass-Through Entity Tax (PTET) workaround remains in place and allows partnerships and S-Corporations to deduct state income taxes at the entity level, outside the individual SALT cap.

  • PTET deductions reduce federal taxable income at the entity level and flow through to owners via K-1s.

For traders operating through entities in high-tax states, PTET elections can materially improve after-tax results, but they must be carefully coordinated with entity accounting and individual returns. A trader might use the standard deduction while deducting most business-related SALT through the pass-through entity. 

See OBBBA Trader Tax Update: 2025 Law Secures Key Provisions for Traders for sections on the OBBBA SALT cap temporary increase to $40,000 for 2025–2029 (indexed at 1% annually from 2026 through 2029), and the 30% phase‑out of that higher cap for taxpayers with modified AGI above $500,000 (indexed annually). Also, in that blog post, see PTET strategies and more in-depth information. 

Reporting for Trader Entities

Trader entities eligible for TTS are primarily tax planning structures, not reporting shortcuts. As discussed in Chapter 7 of Green’s 2026 Trader Tax Guide, entities are typically used to support Trader Tax Status (TTS), facilitate Section 475 elections, optimize health insurance deductions and retirement contributions, and implement SALT/PTET planning—not to change how trades are taxed.

From a reporting standpoint:

  • Trading gains and losses are still reported based on the instrument and elections (Form 8949, Form 6781, or Form 4797), whether trading personally or through an entity.

  • Instead of deducting business expenses on a Form 1040/Schedule C for individuals, deduct trading business expenses on page one of Forms 1065 or 1120-S.

  • Section 475 elections made at the entity level apply only to that entity and must be coordinated carefully with the owners’ individual returns.

  • Pass-through entities issue Schedule K-1s, which must reconcile precisely with the entity’s trading results, expenses, Section 475 MTM adjustments, and PTET deductions. The Schedule K-1 also reports QBI income, wages, and property limits for the phase-out range.

  • S-Corps are the preferred entity choice for TTS traders to unlock employee benefits, including health and retirement benefits. S-Corp officer compensation is critical for these deductions, and payroll must be executed before year‑end for the year in which you want to take health and retirement plan deductions.

Entity tax returns (Forms 1065 or 1120-S) and extensions are generally due March 15, which also drives the timing of entity-level Section 475 elections. Proper entity reporting is about consistency and alignment, ensuring that the entity structure delivers its intended tax benefits without distorting the underlying trader reporting.

Common Missed Tax-Saving Opportunities

  • Failing to qualify for or document Trader Tax Status (TTS)

  • Not deducting eligible trading business expenses on Schedule C

  • Missing or delaying a Section 475 MTM election when beneficial

  • Inefficient wash sale handling for securities traders

  • Not leveraging the Section 1256 60/40 tax treatment for futures

  • Failing to coordinate PTET and entity-level deductions

  • Overlooking a QBI deduction or mishandling it.

Securities Traders and the Section 475 Election

For traders who qualify for TTS, a Section 475 MTM election for 2026 can eliminate wash sale issues but introduces EBL and NOL considerations. The election is complex and must be made on time.

Election Procedures

Section 475 MTM is optional for individual traders who qualify for TTS. To make the election, a trader must file a 2026 Section 475 election statement with their 2025 tax return or extension by April 15, 2026. Existing partnerships and S-Corps that must file a 2025 tax return should file a 2026 Section 475 election by March 15, 2026.

Election Statement

The MTM election statement is a version of the following brief paragraph: “According to Section 475(f), the taxpayer at this moment elects to adopt the mark-to-market method of accounting for the tax year ending Dec. 31, 2026, 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).”

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. A 2025 MTM election filed by April 15, 2025, is perfected on Form 3115 filed with 2025 tax returns — by the 2026 due date of the return, including extensions.

Internal Elections for New Taxpayers

The Section 475 election procedure differs 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 date of the state’s certificate of LLC organization is the inception date.

Final Thoughts

For active traders, tax reporting is not just about compliance—it is a powerful tax planning tool. Properly reported trading activity allows traders to unlock meaningful tax savings through Trader Tax Status, Section 475 MTM, QBI deductions, Section 1256 60/40 treatment, and SALT cap workarounds like PTET.

An effective trader tax strategy requires aligning trading activity, elections, entity structures, and reporting methods so that tax benefits actually materialize on the return. When reporting is done thoughtfully, traders can reduce taxes, improve after-tax performance, and avoid leaving money on the table.

For deeper examples, illustrations, and reporting walkthroughs, see Green’s 2026 Trader Tax Guide.

RSU Stock and Investment Positions: Avoid Costly Section 475 Tax Traps for Traders

October 13, 2025 | By: Robert A. Green, CPA

Traders who receive RSU stock or hold investment positions in the same account as their trading activity can face hidden tax traps under Section 475(f). Learn how to avoid IRS reclassification, excess-business-loss deferrals, and mismatched tax treatment—while still benefiting from Trader Tax Status and Section 475’s powerful advantages.

A Common Issue for Active Traders

Many active traders who qualify for Trader Tax Status (TTS) and elect Section 475(f) mark-to-market (MTM) treatment also receive restricted stock units (RSUs) from their employers, especially in the technology, finance, and biotech sectors.

When RSUs vest, their fair market value (FMV) is taxed as ordinary income, subject to W-2 withholding. Some traders then transfer those vested shares into their Section 475 trading accounts, assuming the shares automatically qualify as part of the trading business.

Unfortunately, the IRS disagrees. Avoid this problem by selling the RSU-acquired public-company stock and repurchasing it in your TTS trader account. The trader below did not—and ended up with significant phantom income and NOL carryforwards.

(For a basic overview of Trader Tax Status, see IRS Topic No. 429: Traders in Securities.)

IRS Position: RSU Stock Is Not Section 475 Property

RSUs are deferred-compensation property governed by Section 83. No stock is owned until the vesting date, when the employee gains unrestricted rights to the shares. At that time, the FMV becomes ordinary wage income, reported on Form W-2, and it becomes the tax basis.

Acquisition Timing:
The RSU shares are considered acquired on the vesting date, not when deposited into a brokerage or trading account. The subsequent deposit of shares is an administrative action only—it does not change the character of the stock from compensation property to trading property. Even if the shares are immediately transferred into a trader’s Section 475 account, they remain compensation assets governed by Section 83, not trading assets under Section 475(f).

Public vs. Private RSUs:
This rule applies to both public and private company RSUs. Private-company RSUs often include “double-trigger” vesting (time + liquidity). Even after a liquidity event, the shares remain compensation property under Section 83, not trading property under Section 475(f).

Even if the shares are deposited directly into a trader’s MTM account, they were acquired through employment, not through the trading business. Therefore, they fall outside Section 475(f). Section 475 applies only to securities acquired and held in connection with a trading activity, not to compensation or investment assets merely moved into the account.

IRS Chief Counsel Advice 201432016 (Aug. 8, 2014) supports this conclusion (while a CCA is not precedential, it reflects the IRS’s administrative interpretation and is generally followed in practice):

“Section 475(f) applies only to securities held for trading in the ordinary course of a trade or business. Merely transferring such securities into a trading account does not convert them into property held in connection with the trading business.”

Under Proposed Reg. § 1.475(f)-2(a)(2)–(4), RSU-acquired shares are compensation assets, not trading property, and therefore excluded from Section 475(f) mark-to-market accounting—even if later transferred. Although still proposed, these regulations have guided IRS practice since 1998 and remain the accepted authority.

Although the proposed regulation does not explicitly mention employment-related compensation property, its framework distinguishes between trading and non-trading assets. RSU shares fall outside Section 475 because they are governed by Section 83 as compensation property—not acquired in the ordinary course of a trading business. This interpretation is supported by IRS Chief Counsel Advice 201432016 and has been consistently applied by the IRS in its administrative practice.

Once vested, RSU shares have a basis equal to the amount already included in W-2 income, and any subsequent gain or loss is capital, not ordinary. Since the shares were not acquired for trading purposes, Section 475 cannot be applied retroactively.

Brokerage Note: The RSU cost basis is often omitted on Form 1099-B, resulting in an overstated gain. To avoid double taxation, adjust the basis on Form 8949 to include amounts already taxed through W-2 income.

Example: How Mismatched Character and the EBL Limit Create a Tax Trap

A trader receives $1 million of employer stock at RSU vesting (already taxed through payroll) and moves it into the trading account. Later, they trade the position and realize a $750,000 gain, while incurring $900,000 of ordinary trading losses under Section 475(f).

If the RSU stock were ordinary under Section 475, the $750,000 gain would offset most of the $900,000 loss, leaving a net business loss of $150,000 within the Excess Business Loss (EBL) limitation.

However, the IRS treats the RSU shares as capital assets. Even though the trader has an economic loss of $150,000, they owe tax on phantom income of $124,000 because the EBL limit for 2025 is $626,000 (MFJ) / $313,000 (single). The remaining $274,000 EBL becomes an NOL carryforward, usable later but offering no immediate relief.

An NOL carryforward is generally superior to a capital loss carryover, because the NOL can offset income of any kind in future years. In contrast, capital losses may only offset capital gains (plus $3,000 per year against ordinary income). The EBL limitation is indexed annually for inflation, so it primarily affects traders with substantial losses.

The trader could have avoided this problem by selling the RSU-acquired stock when vested and repurchasing it inside their TTS trading account.

A Similar Trap for Traders with Investment Positions

Before discussing portfolio margining and holding period issues, let’s first address the process of transferring assets from a non-MTM investment account into a Section 475(f) trading account.

Moving a security from an investment account into a trading account does not convert it into Section 475 property. To qualify for mark-to-market treatment, a position must be acquired and held in connection with the trading business—not merely transferred after acquisition.

When a trader first elects Section 475(f), a Section 481(a) adjustment converts opening-year TTS trading positions (previously reported under the realization method) into mark-to-market assets by revaluing those securities to fair market value on the first day of the election year. The difference between the prior-year basis and the MTM value becomes the Section 481(a) adjustment, ensuring a clean transition into the new accounting method.

Under Prop. Reg. § 1.475(f)-2(a)(2)–(4) and Section 475(f)(1)(B)(ii), traders must make timely same-day identifications of any investment-held securities to preserve segregation. Once identified, those positions remain permanently outside Section 475 treatment.

Suppose a trader later trades options around those investment positions (for example, selling covered calls). In that case, the stock remains a capital asset, while the option trades can qualify for Section 475 ordinary treatment.

To avoid potential IRS reclassification or mixed-character outcomes, traders should ring-fence their long-term investments in separate individual or joint accounts and/or conduct their TTS/Section 475 activity in an entity account with its own Employer Identification Number (EIN).

Court Cases Reinforce the IRS Position

In Endicott v. Commissioner (T.C. Memo 2013-199), the Tax Court held that holding significant equity positions while trading options around them resembled investment management, rather than an active trading business. The average holding period exceeded 31 days, which the IRS still uses as a bright-line benchmark for TTS analysis.

Similarly, in Holsinger v. Commissioner (T.C. Memo 2008-191), monthly option trading failed the frequency and continuity tests for TTS. Both cases involved portfolio margining that blurred the line between investing and trading, thereby undermining TTS eligibility.

Takeaway: Mixing long-term investments and trading in one account can jeopardize both TTS and Section 475 benefits. Use separate accounts or entities to clearly ring-fence your trading business.

Broader Section 475 Mismatch Risks

While Section 475(f) is typically the most tax-efficient method for active traders, mismatches can occur when some income is classified as capital gain and some as ordinary income. The EBL limits ($313,000 single / $626,000 MFJ for 2025) are relatively high, and most traders don’t lose enough to be affected. Conversely, a trader might have Section 475 income and capital losses, creating the reverse problem.

Example: The Reverse Mismatch

A trader has an $800,000 Section 475(f) MTM gain and sells long-term investment stocks at a $300,000 capital loss. Because the loss is capital, it cannot offset the ordinary 475 income. The trader pays tax on the full $800,000 of ordinary income while carrying forward the $300,000 capital loss, which is usable only against future capital gains ($3,000 per year against ordinary income).

A similar trap arises if RSU stock drops in value after vesting—the subsequent sale produces a capital loss that cannot offset Section 475 ordinary trading income, leaving the trader with higher taxable income despite an overall economic loss.

These mismatches underscore the importance of meticulous planning, account segregation, and accurate year-end tax projections.

Why Section 475(f) Still Matters

Despite these pitfalls, Section 475 remains the best framework for most active traders. Its benefits are substantial:

  • Converts trading results to ordinary income or loss

  • Eliminates wash-sale rules

  • Bypasses the $3,000 capital-loss limit

  • Enables the 20% Qualified Business Income (QBI) deduction for profitable TTS traders operating as pass-through entities or Schedule C sole proprietors

    (SSTB phase-out range for 2025: $394,600–$494,600 MFJ / $197,300–$247,300 single)

Even traders below these thresholds can enjoy the full 20% QBI deduction—another reason Section 475 remains powerful.

California Makes It Even Tougher

California conforms to the federal EBL limit and has suspended NOL deductions for 2024–2026 if AGI exceeds $1 million. This suspension applies even to business losses under Section 475(f).

Any disallowed EBL becomes part of a California NOL carryforward but cannot be used until the suspension lifts. Budget bills SB 167 and SB 175 could be reinstated earlier if state revenues recover.

Audit Checklist: Section 475(f) and TTS Compliance Essentials

  • Adjust the RSU basis on Form 8949 to reflect W-2 income already reported

  • Make timely written identifications of investment positions per Prop. Reg. § 1.475(f)-2(a)(2)–(4)

  • Consider separate entities (with distinct EINs) to ring-fence trading vs. investing

  • Document Section 475 elections and revocations with timely-filed notification statements to the IRS and Form 3115 per Rev. Proc. 2025-23 — see GreenTraderTax: New IRS Rules — Section 475 MTM Revocation Now Locked for Five Years

  • Segregate trading and investment accounts at the broker level

  • Track average holding periods (≤ 31 days) to support TTS qualification

Need Professional Guidance?

Each trader’s facts are unique—especially when RSU stock, segregated investments, and Section 475 intersect.


CPAs at Green, Neuschwander & Manning, LLC (GNM) can help you analyze your facts, minimize mismatches, and plan for 2025 and beyond.

👉 Schedule a consultation at GreenTraderTax.com

Sources & Further Reading

  • IRS Chief Counsel Advice 201432016 (Aug. 8, 2014)

  • Proposed Reg. § 1.475(f)-2(a)(2)–(4)

  • Section 475(f)(1)(B)(ii) identification requirement

  • Endicott v. Commissioner, T.C. Memo 2013-199

  • Holsinger v. Commissioner, T.C. Memo 2008-191

  • Rev. Proc. 2025-23 — Section 475 Revocation Lock-In Rule

  • IRS Topic No. 429 — Traders in Securities

  • California FTB NOL Suspension 2024–2026

  • Articles on Section 475 and TTS at GreenTraderTax.com

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:

  1. Elect PTET for S-Corp → $35K state tax deduction from gross income, unlocking full standard deduction on individual tax return.

  2. Harvest (sell) $20K capital losses → offset against capital gains.

  3. Contribute the maximum allowed $70K Solo 401(k) through S-Corp.

  4. Health insurance deduction $25k through S-Corp.

  5. Pay $186K W-2 salary → to maximize Solo 401(k) and also qualify for partial QBI deduction within the phaseout range.

  6. 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

Tax Extensions 2024: 12 Tips To Save You Money by April 15, 2025

March 30, 2025 | By: Robert A. Green, CPA

Individual tax returns for 2024 are due April 15, 2025, but many active traders won’t be ready to file on time. Brokers often issue corrected 1099-Bs close to the deadline, and partnerships and S-Corps filing by March 17, 2025, may not deliver K-1s until after April 15. Add to that the complexity of wash sale accounting, and it’s easy to see why most active traders file extensions—and why doing so can save you money.

You may not need to file an extension if you’re eligible for disaster tax relief. But if you plan to elect Section 475 MTM for 2025, you’ll want to file an extension and attach your election statement.

Tip 1: Get a Six-Month Extension to File

Request an automatic extension by April 15, 2025, using Form 4868. This allows you to file your federal return until October 15, 2025. The IRS doesn’t require a reason—submit the form and pay any tax due. This is an extension to file, not to pay, so you must estimate and pay your 2024 taxes by April 15 to avoid penalties.

Tip 2: Avoid IRS and State Penalties

IRS penalties can be steep:

  • Late-filing penalty: 5% of the unpaid tax per month (max 25%).

  • Late-payment penalty: 0.5% per month (max 25%).

Avoid the late filing penalty by filing the extension on time, even if you can’t pay your entire tax bill. If you pay at least 90% of your tax liability by April 15 and file your return by October 15, paying the balance due, you may avoid the late-payment penalty, too—especially if you have reasonable cause.

Tip 3: File Even If You Can’t Pay

Let’s say you owe $50,000 and file your extension on time but can’t pay. If you file your tax return on October 15, 2025, you would incur a late-payment penalty of $1,500 (six months × 0.5% × $50,000), plus interest. However, by filing the extension on time, you’d avoid the much steeper late filing penalty of $11,250. That’s 7.5 times more costly than paying late. 

  • 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 15, 2025.
  • Explanation: The IRS reduces the late-filing penalty by the amount of the late-payment penalty in months when both apply. So in this case: 22.5% × $50,000 = $11,250 avoided.

Tip 4: Add a Cushion for Q1 2025 Estimated Taxes

If you’re profitable in early 2025, consider overpaying your 2024 tax extension to cover Q1 2025 estimated taxes. This strategy:

  • Covers underpayment risk for 2024.

  • Funds Q1 2025 estimated taxes.

  • Creates a refundable overpayment if your 2025 income ends up lower.

With IRS underpayment interest at 7% (2025 Q1), overpaying can be a strategic move.

Tip 5: Consider a 2025 Section 475 MTM Election

Traders with trader tax status (TTS) should consider electing Section 475(f) to convert capital gains/losses to ordinary income/loss, avoid the wash sale rule and capital loss limitation, and qualify for the 20% QBI deduction. (See Unlock Tax Savings with Section 475: Avoid Wash Sales and Capital Loss Limits.)

Deadlines:

  • Individuals: Attach the 2025 Section 475(f) election to a 2024 tax return or extension filed by April 15, 2025.

  • Partnerships & S-Corps: Attach to a return or extension filed by March 17, 2025.

Also, remember to file Form 3115 with your 2025 tax return to complete the election process.

Tip 6: File When It’s Convenient

Wealthy and organized taxpayers often treat October 15 as the absolute deadline and file in the summer. Rushing to file a complete tax return by April 15 can result in errors and missed deductions. You can use the extra time wisely. That said, don’t forget to file the extension by April 15, 2025.

Tip 7: Be Conservative With Payments

Be aggressive on your tax positions but conservative with cash. If you overpay, apply the excess to 2025 estimated taxes and avoid red flags. Traders often benefit from carrying over credits rather than requesting refunds.

Tip 8: Get More Time for Retirement Plan Contributions

Filing an extension gives you more time to fund your Solo 401(k), SEP IRA, or defined benefit plan for 2024—until October 15, 2025. However, IRA contributions are still due by April 15, 2025.

Tip 9: Respect Your Accountant’s Process

Extensions: Let your tax pro prepare a solid draft and finalize your return when complete information arrives. Don’t pressure them into a rushed April filing, especially if you’re missing K-1s or trade reconciliations.

Tip 10: Focus on Trade Accounting After April 15

If you’re locked into a $3,000 capital loss limitation, don’t obsess over precise wash sale adjustments before filing an extension. However, if trade accounting could swing you from a capital loss to a gain, prioritize it before April 15. Section 1256 and forex traders can rely on simpler reporting formats.

Tip 11: File State Extensions and PTE Payments

Many states accept the federal extension, but not all. If you owe state taxes, file a state extension and pay any projected taxes on time—states are often less flexible than the IRS. Partnerships and S-Corps should also make PTE tax payments with their Form 7004 extensions to benefit from SALT cap workaround programs.

Tip 12: Know the Rules for U.S. Expats

If you live abroad, the IRS gives you an automatic two-month extension until June 16, 2025, to file and pay. You can also file Form 4868 for an additional four months until October 15. Be sure to understand your eligibility and requirements.

Final Thought

Extensions aren’t procrastination—they’re thoughtful tax planning. They give traders and investors time to make strategic decisions and file fully, accurately, and without stress.

Tips For Traders On Preparing 2023 Tax Returns

March 7, 2024 | By: Robert A. Green, CPA | Read it on

Trader tax status (TTS) constitutes business expense treatment, unlocking meaningful tax benefits for qualified active traders. The first step is to determine eligibility.

If you qualify for TTS, you can claim some tax breaks, such as business expense treatment, after the fact and elect and set up other tax breaks—like Section 475 MTM and employee-benefit plans (health and retirement)—on a timely basis.

TTS business expenses
If you qualified for TTS in 2023, you could claim business expenses on Schedule C. No IRS election was required. Schedule C is part of an individual tax return (Form 1040).

On an S-Corp or partnership tax return, deduct TTS business expenses on page 1 from ordinary business income. (Business expenses are not separately stated items on Schedule K-1).

Please have a look at the GreenTraderTax Center for a list of TTS business expenses.

Section 475: MTM accounting
Don’t confuse TTS business expenses with a Section 475 MTM accounting election that a TTS trader could have submitted by April 18, 2023, for the tax year 2023. (Or, if elected in a prior year.)

The 475 election is like graduate school, and TTS is like undergraduate university; you need TTS to make and use a 475 election.

Without a timely 475 election, it’s too late to avoid wash sale losses and the $3,000 capital loss limitation. And there’s no qualified business income (QBI) deduction on capital gains; QBI is allowed on Section 475 income.

How to qualify for trader tax status
The volume of trades: We recommend an average of four transactions per day, four days per week, 16 trades per week, 60 a month, and 720 annually. Count each open and closing transaction separately, not round-trip. Scaling in and out counts, too. If the broker breaks down the trades into smaller lot sizes, don’t count those extra lot sizes.

While a full year looks better, a partial year is okay. We prefer that you establish TTS for a minimum of Q4. For example, start TTS by October 1, 2023, and continue TTS well into 2024.

Frequency: Execute 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 is a bright-line test.

Segregate investments: It is wise to segregate investments from trading. Otherwise, the IRS could consider the long investment holding periods, which can make the average holding period over 31 days, undermining qualification for TTS.

Trades full-time or part-time a good portion of the day. Part-time and money-losing traders face more IRS scrutiny. Part-year qualification for TTS is okay.

Hours: Spends more than four hours daily, almost every market day, working on their trading business.

Avoid sporadic lapses: A trader has few to no intermittent stoppages during the trading year. Vacations are okay.

Intention: Has the intention to run a business and make a living. It doesn’t have to be your primary source of income.

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. We want to see over $15,000 for the minimum account size for trading futures.

For more information, see Trader Tax Status: How To Qualify.

Tax reporting for a sole proprietorship trading business
The IRS uses multiple tax forms for trading businesses eligible for trader tax status (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.

Schedule C
Most sole-proprietorship businesses report revenue, cost of goods sold, and expenses on Schedule C. The IRS can quickly determine whether they are profitable but cannot do so with sole proprietorship traders.

Traders qualifying for TTS report only trading business expenses on Schedule C. Trading gains and losses are reported on other tax forms, depending on the situation.

If possible, it’s helpful to include a tax return footnote tying the trader’s schedules together to show profitability.

Consider the transfer strategy, which moves some trading gains to Schedule C (other income) to break even and not show a profit.

Schedule D and Form 8949
Sales of securities for each trade are reported on Form 8949, which feeds into Schedule D.

Net capital losses against ordinary income are limited to $3,000 per year. The rest is a capital loss carryover. Capital losses are unlimited compared to capital gains.

If you have significant capital loss carryovers going into 2024 and substantial trading gains by April 15, 2024, consider skipping a 2024 Section 475 election due on that date. That would convert trading income to ordinary income, not using up the capital loss carryover.

Form 8949 and wash sale reporting
See Form 8949 and the IRS instructions for Form 8949:

“Exception 1. Form 8949 isn’t required for certain transactions. You may be able to aggregate those transactions and report them directly on either line 1a (for short-term transactions) or line 8a (for long-term transactions) of Schedule D. This option applies only to transactions (other than sales of collectibles) for which: • You received a Form 1099-B (or substitute statement) that shows basis was reported to the IRS and didn’t show any adjustments in box 1f or 1g. ”

Most traders generate wash sale loss (WS) adjustments, which are reported on boxes 1f and 1g, so 1099-Bs with WS don’t meet the above exception; the trader must report each trade on Form 8949.

See Securities, Accounting Solutions, and Form 8949 & 1099-B Issues.

Schedule 4797 for MTM accounting
TTS traders who elected and have Section 475 MTM on securities report each securities trade on Form 4797 Part II.

MTM accounting means open securities trades are marked-to-market at year-end prices.

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 can also benefit from Section 475, which includes a 20% qualified business income (QBI) deduction. With QBI, there are thresholds and caps.

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

You’ll be able to learn about making a Section 481(a) adjustment to convert from the realization to the MTM method of accounting.

A Section 475 election for 2023 was due by April 18, 2023. The next opportunity to elect 475 is in 2024, by April 15, 2024. 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.

Net operating losses (NOL)
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.

The TCJA carries forward NOLs indefinitely (20 years before the TCJA changes).

The NOL deduction is limited to 80% of the subsequent year’s taxable income. 

Excess business losses (EBL)
In 2018, the TCJA introduced an excess business loss (EBL) limitation.

The 2020 CARES Act 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.

The inflation-adjusted 2023 EBL threshold is $578,000 (married)/$289,000 (other taxpayers), and the 2024 EBL threshold is $610,000 (married)/$305,000 (other taxpayers).

Add the excess over the EBL threshold to an NOL carryforward.

Deduction on qualified business income (QBI)
In 2018, 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 be eligible for a 20% deduction on qualified business income (QBI).

TTS traders are considered a “specified service trade or business” (SSTB), so taxable income above the following thresholds is not deductible: $364,200/$182,100 (married/other taxpayers) for 2023 and $383,900/$191,950 (married/other taxpayers) for 2024.

There is also a phase-out range above the threshold of $100,000/$50,000 (married/other taxpayers). The W-2 wage and property basis limitations apply within the phase-out range. TTS traders with an S-Corp usually have wages, whereas sole proprietorship traders do not.

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

See IRS Form 8995 and 8995-A.

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 rely on a one-page Form 1099-B showing their net trading gain or loss (aggregate profit or loss on contracts) using mark-to-market accounting. 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) is subject to lower long-term capital gains rates, and 40% is taxed as short-term capital gains using the ordinary rate. 

At the maximum tax bracket for 2023, 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.

If a trader or investor has a significant Section 1256 loss, they should consider carrying it back for 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.

Please take a look at Section 1256 Contracts.

Digital assets, including cryptocurrencies
For sales of digital assets, including cryptocurrencies, use Form 8949.

Digital assets are not subject to wash sale loss rules or Section 475 MTM because the IRS treats digital assets as ”intangible assets,” not securities or commodities.

Be sure to answer the IRS question on tax returns about digital assets. See https://www.irs.gov/newsroom/taxpayers-should-continue-to-report-all-cryptocurrency-digital-asset-income.

For more information, see Cryptocurrencies.

Tax treatment for financial products
I cover tax treatment for 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. See Tax Treatment On Financial Products.

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.

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. What matters is how much of the WS loss is open and deferred to the subsequent tax year.

Buying back a losing A December 2023 trade within 30 days of January 2024 triggers a 2023 WS loss.

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

See Wash Sale Losses.

I have recommended TradeLog (TL) every year since 2001, when I 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 and 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.

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

See Entity Solutions, Retirement Plan Solutions, and Tax Planning For S-Corps.

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 29 states have enacted SALT cap workaround laws. Generally, it would be best to elect to make a “pass-through entity” (PTE) payment on a partnership or S-Corp tax return filed by your business. This 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. 

Common errors

Reporting trading gains and losses on Schedule C
Some accountants intuitively think TTS traders should enter trading income, loss, and expenses on Schedule C like other sole proprietors. 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 attempt to evade wash sale (WS) loss adjustments and capital loss limitations.

Section 475 trades are detailed on Form 4797 Part II, ordinary gains and losses, not 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 (dealer) member of an options or futures exchange and trading Section 1256 contracts on that exchange (Section 1402i).

Adjusted gross income (AGI) errors
Some TTS traders incorrectly contribute to a retirement plan based on trading income and end up with an “excessive contribution” subject to tax penalties. Trading income is unearned income, and contributions to retirement plans require earned income. 

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 officer compensation for retirement and health insurance deductions before year-end.

Net investment tax errors
Trading gains and losses are included in net investment income (NII) when calculating the ACA’s 3.8% net investment tax (NIT).

Some traders do not deduct TTS trading expenses from NII, and you cannot deduct investment fees and costs from NII.

See IRS Form 8960 and Tax Center: ACA Net Investment Income Tax. 


Proprietary traders
Proprietary traders significantly differ from retail traders and have special tax compliance needs. They don’t trade their capital. They trade the firm’s capital, usually accessed from a sub-trading account. A prop trader becomes associated with a prop-trading firm either as an LLC member (Schedule K-1), an independent contractor (1099-MISC), or an employee (W-2). See our tax center for tax strategies for prop traders. Click here.

Tax extensions

Individual 2023 income tax returns are due by April 15, 2024; 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 and often after the filing deadline.

Many partnerships and S-Corps file extensions by March 15, 2024, and don’t issue final Schedule K-1s to investors until after April 15.

Traders don’t have to rush to complete their tax returns by April 15. They can use a simple one-page automatic extension and pay taxes owed to the IRS and state.

Tax payments are due with the extension
Traders can request an automatic six-month extension to file individual federal and state income tax returns until October 15, 2024.

The 2023 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. Based on the tax information received, taxpayers should estimate and report what they think they owe for 2023.

Avoid late filing and late payment penalties
I suggest taxpayers learn how the IRS and states assess late-filing and late-payment penalties so they can avoid or reduce them. Interest expense of 8% applies to a balance due after April 15, 2024, too. Click here.

If taxpayers cannot pay the taxes owed, they should estimate the balance due by April 15 and report it on the extension.

Please make sure to file the automatic extension on time to avoid the late filing penalties, which are much higher than the late payment penalty.

Please look at 2023 Form 4868, page two, for an explanation of calculating these penalties.

See Tax Extensions: 12 Tips To Save You Money.

Read Green’s 2024 Trader Tax Guide and watch related webinar recordings for more information.

Traders Should Focus On Q4 Estimated Taxes Due January 16

January 2, 2024 | By: Robert A. Green, CPA | Read it on

Many traders have substantial trading gains for 2023, and they might owe 2023 estimated taxes paid to the IRS quarterly. Unlike employers, which withhold taxes on wages, brokerage firms do not withhold taxes on trading gains. Depending on their specific tax situation, other taxpayers may be able to wait to make tax payments until April 15, 2024, when they file their 2023 tax return or extension.

The first three quarterly estimated tax payments were due on April 18, June 15, and September 15, 2023; the fourth quarter payment is due on January 16, 2024. Many new traders didn’t submit estimated payments for the first three quarters, waiting to see what Q4 brought. Also, some traders view skipping estimated tax payments as a margin loan with interest rates of 7% for Q1 and Q2 2023 and 8% for Q3 and Q4 2023. 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 total payments made equal 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 you are single/married filing separately, then the safe-harbor rate rises to 110% of the previous year’s tax amount. 

Activity in Jan. 2024 can trigger wash sale losses for 2023, thereby creating more taxable income in 2023.

Suppose your 2022 tax liability was $40,000 and your AGI was over $150,000. Assume 2023 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 16, 2024, and paying the balance of $56,000 by April 15, 2024. This is a good option when compared to sending $90,000 in Q4 (90% of $100,000). Consider setting aside that tax money due on April 15, 2024, rather than risking it in the financial markets in Q1 2024. I’ve seen some traders lose the money they planned to use to pay taxes by trading it in the market. No money to pay your taxes causes trouble with the IRS. (See the example below.)

If your 2023 income tax liability is significantly lower than your 2022 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 2023 Form 2210. Consider using Form 2210’s Annualized Income Installment Method if the trader generates most of his trading income later in the year. The default method on Form 2210 allocates the annual income to each quarter, respectively.

Learn more about estimated taxes at https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes.

Here’s an example of what to avoid: Assume Joe Trader has massive capital gains taxes to pay for 2023. However, due to a market correction in early 2024 and being on the wrong side of many trades, Joe might incur significant capital losses in early 2024 in trading securities (equity options and equities). Unfortunately, Joe might lose much of the tax money he owes the IRS and state for 2023 taxes. Without an election, traders and investors will get stuck with a $3,000 capital loss limitation in 2024 and must carry over capital losses to subsequent years. However, Joe is eligible for trader tax status (TTS), so he submits a 2024 Section 475 election to the IRS by April 15, 2024, for ordinary gain or loss treatment with mark-to-market accounting to apply to his 2024 losses.

While this election won’t get back his tax money lost, the Section 475 election makes Joe’s 2024 trading losses “ordinary”; therefore, they will offset his other 2024 income, like wages and retirement plan distributions, thereby reducing 2024 taxes due. However, the 2017 TCJA legislation has an “excess business loss” (EBL) limitation in 2024 of $610,000 (married)/$305,000(other taxpayers). Business losses over the limit are considered EBL and become 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 2024. Before 2018, traders could carry back massive NOLs to replenish their trading capital and stay in business. The 2020 CARES Act 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.

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.

Related webinar with recording on Jan. 10, 2024: Significant Tax Moves For Traders To Make in Q1 2024.

Star Johnson, CPA, contributed to this blog post.

 

 

Tax Planning For Traders

September 22, 2023 | By: Robert A. Green, CPA | Read it on

Read our related blog post: Tax Planning For S-Corps.

Traders have unique needs and opportunities in tax planning. Get organized well before the year-end so you don’t miss out.

Recent 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 the article, IRS Provides Tax Inflation Adjustments for Tax-year 2023. The IRS increase for 2023 is about 7%.

EXCESS BUSINESS LOSSES AND NET OPERATING LOSSES

TTS traders with a Section 475 election might incur ordinary business losses for 2023. 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.

DEFER INCOME AND ACCELERATE TAX DEDUCTIONS

Consider deferring income and accelerating tax deductions if you don’t expect your taxable income to decline in 2024.

Traders eligible for TTS in 2023 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 Income-Related Monthly Adjustment Amount (IRMAA) adjustment, raising Medicare premiums.

ROTH IRA CONVERSION

Consider 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 income taxed at ordinary rates. Futures growth and capital in the Roth IRA account are tax-free. If your retirement portfolio is depressed, 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 2023 is $289,000 ($578,000 for married), so $116,000 is an NOL carryover. The taxpayer should consider a Roth conversion to soak up most of the $289,000 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 for over 12 months. The 2023 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 https://taxfoundation.org/data/all/federal/2023-tax-brackets/. 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). 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 and losses. 

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 business property expensing; 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 2023 may consider going on a shopping spree before Jan. 1. There is no sense in deferring TTS expenses because you cannot be sure you will qualify for TTS in 2024.

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 the end of the year. 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 29 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 costs. 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. (The IRS should publish the 2024 standard deduction amounts later in 2023.)

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 2023 state-estimated income taxes by Dec. 31, 2023 (a strategy before TCJA). Taxpayers should pay federal and state estimated taxes owed by Jan. 15, 2024, and the balance by April 15, 2024.

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 Jan. 15, 2024, 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 Jan. 18.)

See Interest rates increase for the fourth quarter 2023. 

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 loophole applies to 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 equity, an option on that equity (equity option), and those 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 (i.e., TradeLog) 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 Jan. 1, 2024, can break the chain on individual account WS at year-end 2023, 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 2023 for TTS traders. A Section 475 election in 2024 converts year-end 2023 WS losses on TTS positions (not investment positions) into ordinary losses in 2024. That’s better than a capital loss carryover into 2024, which might give you pause when making a 2024 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 concerning wash sale loss adjustments in Green’s 2023 Trader Tax Guide Chapter 4.) 

TRADER TAX STATUS AND SECTION 475

Traders who qualified for TTS in 2023 may accelerate trading expenses into that qualification period as sole proprietors or entities. Those who don’t qualify until 2024 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 2023 Section 475 election, individual taxpayers had to file an election statement with the IRS by April 18, 2023 (March 15, 2023, for existing S-Corps and partnerships). If they filed that election statement on time, they must complete the election process by submitting a 2023 Form 3115 with their 2023 tax return. Those who missed the 2023 election deadline may want to consider the election for 2024. 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, 2024, takes effect on Jan. 1, 2024. When converting from the realization (cash) method to the mark-to-market (MTM) method, a Section 481(a) adjustment needs to be made on Jan. 1, 2024. The adjustment reports in 2024 taxable income the unrealized capital gains and losses on open TTS securities positions held on Dec. 31, 2023. The adjustment should not be made for year-end investment positions, and those who don’t qualify for TTS at year-end 2023 won’t have a Section 481(a) adjustment to report for the 2024 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, 2023). Forming a new entity on November 1, 2023, or later, is too late for establishing TTS for the 2023 year within the entity; we would like to see all of Q4 for entity TTS eligibility at a minimum. Consider waiting until Jan. 1, 2024, 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 can 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 in our tax guide, Chapters 2 and 7.) 

SUSPENDING TTS AND SECTION 475

Assume a TTS/475 trader stopped trading on June 30, 2023. They must use Section 475 through June 30, 2023, but may only use it for part 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 2024 by April 15, 2024. Without 475 going into year-end, the trader should try to avoid wash sale loss adjustments at year-end.

TAX-LOSS HARVESTING

If you have an investment or trading portfolio, you can reduce capital gains taxes via “tax-loss harvesting” before the year’s end. If you realized significant capital gains year-to-date in 2023 and have open positions with substantial unrealized capital losses, consider selling some losing positions to reduce 2023 taxes on capital gains.

Be sure to wait 30 days to repurchase those securities to avoid wash sale loss adjustments, which would postpone the 2023 year-end tax loss to 2024, 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 using the “specific identification accounting method” vs. first-in-first-out. (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. 

You can also donate appreciated securities to charity if you don’t mind. You get a charitable deduction at the fair market value and avoid capital gains taxes. (This is a strategy billionaires use, which you can use.)

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 and subsequent years. (See the IRS site for Charitable Contribution Deductions.) 

TAX RELIEF: PRESIDENTIALLY DECLARED DISASTER AREAS

There have been several climate disasters in 2023, including hurricanes, wildfires, winter storms and floods. Check the irs.gov site for Tax Relief in Disaster Situations.

Highlights From Green’s 2023 Trader Tax Guide

April 18, 2023 | By: Robert A. Green, CPA

Use Green’s 2023 Trader Tax Guide to receive the tax breaks you’re entitled to on your 2022 tax returns and execute tax strategies and elections for tax-year 2023. Our guide covers the impact of recent tax laws on traders.

BUSINESS TRADERS FARE BETTER

Investors have restricted investment interest expense deductions. The Tax Cuts & Jobs Act (TCJA) suspended investment fees and expenses for 2018 through 2025. Investors have a capital-loss limitation against ordinary income ($3,000 per year) and wash-sale (WS) loss adjustments, which can trigger capital gains taxes on phantom income. Investors benefit from lower long-term capital gains rates on positions held for 12 months or more before a sale (0%, 15%, and 20%). If traders have long-term investment positions, this is also available to them.

Traders eligible for trader tax status (TTS) are entitled to many tax advantages. A sole proprietor (individual) TTS trader deducts business expenses, startup costs, margin interest, and home-office expenses. TTS allows them to elect Section 475 MTM ordinary gain or loss treatment promptly. To deduct health insurance and retirement plan contributions, a TTS trader needs an S-Corp to create earned income with officer compensation. TTS traders use a pass-through entity (partnership or S-Corp) to arrange a state and local tax (SALT) cap workaround in many states.

TTS is different from the election of Section 475 MTM accounting. TTS is like an undergraduate university, and Section 475 is like graduate school. The 475 election converts new capital gains and losses into ordinary gains and losses, avoiding the $3,000 capital loss limitation. Only qualified business traders may use Section 475 MTM; investors may not. Section 475 trades are also exempt from WS loss adjustments. The 20% deduction on qualified business income (QBI) includes Section 475 ordinary income but excludes capital gains, interest, and dividend income.

A business trader can assess and claim TTS business expenses after year-end and even go back three open tax years. TTS does not require an election. But business traders may only use Section 475 MTM if they filed an election on time, either by April 18, for 2022 and 2023, or within 75 days of inception of a new taxpayer (i.e., a new entity). For more on TTS, see Chapter 1; for Section 475, see Chapter 2.

CAN TRADERS DEDUCT TRADING LOSSES?

Deducting trading losses depends on the instrument traded, the trader’s tax status, and various elections.

Many traders bought this guide, hoping to find a way to deduct their trading losses. Maybe they qualify for TTS, but that only gives them the right to take trading business expenses on Form 1040/Schedule C.

Securities, Section 1256 contracts, ETNs, and cryptocurrency trading receive default capital gain/loss treatment. Suppose a TTS trader did not file a Section 475 election on securities and commodities on time (i.e., by April 18, 2022) or have Section 475 from a prior year, they are stuck with capital loss treatment on securities and Section 1256 contracts. Section 475 does not apply to ETN prepaid forward contracts (not securities) or cryptocurrencies (intangible property).

Capital losses offset capital gains without limitation, whether short-term or long-term, but a net capital loss on Schedule D is limited to $3,000 per year against other income. Excess capital losses carry over to the subsequent tax year(s).

Once taxpayers get in the capital loss carryover trap, they often face a problem: how to use up the capital loss carryover in the following year(s). If a taxpayer elects Section 475 by April 18, 2023, the 2023 TTS trading gains will be ordinary rather than capital, thereby not utilizing the capital loss carryover. Once a trader has a capital loss carryover hole, they need a capital gains ladder to climb out of it and a Section 475 election to prevent digging an even bigger one. The IRS allows revocation of Section 475 elections if a Section 475 trader later decides they want capital gain/loss treatment again. Chapter 2 covers this topic in depth.

Traders with capital losses from Section 1256 contracts (such as futures) might be lucky if they had gains in Section 1256 contracts in the prior three tax years. On the top of Form 6781, traders can file a Section 1256 loss carryback election. This election allows taxpayers to offset their current-year net 1256 losses against prior-year net 1256 gains to receive a refund of taxes paid in prior years. TTS traders may elect Section 475 MTM on commodities, including Section 1256 contracts. Still, most elect it on securities only to retain the lower 60/40 capital gains tax rates on Section 1256 gains, where 60% is considered a long-term capital gain, even on day trades. The other 40% fall under ordinary income rates.

Taxpayers with losses trading forex contracts in the off-exchange Interbank market may be in luck. Section 988 for forex transactions receives ordinary gain or loss treatment by default, which means the capital-loss limitation doesn’t apply. However, the forex loss isn’t considered a business loss without TTS. It can’t be included in a net operating loss (NOL) carryforward calculation — potentially making it a wasted loss since it also can’t be added to the capital-loss carryover. If the taxpayer has another source of taxable income, the ordinary loss offsets it; the concern is when there is negative taxable income.

A TTS trader using Section 475 on securities has ordinary loss treatment, which avoids wash-sale loss adjustments and the $3,000 capital loss limitation. Section 475 ordinary losses offset income of any kind. However, Section 475 losses and TTS business expenses are subject to the excess business loss (EBL) limitation for tax years 2022 and 2023. Anything over the EBL threshold is a net operating loss (NOL) carryforward.

Those not using Section 475 must deal with wash-sale loss adjustments.

WASH-SALE LOSSES

Day and swing traders inevitably trigger many WS loss adjustments amounting to tens or hundreds of thousands of dollars. Create a WS loss when you take a loss on a security and repurchase it within 30 days (after or before).

A wash sale reduces the cost basis on the position sold and adds the WS loss to the replacement position’s cost basis, 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.

You can “break the WS chain” at year-end. For example, sell your entire position in security A by Dec. 20, 2022, and don’t repurchase it for 30 days — around Jan. 21, 2023. Waiting allows you to deduct the whole year of WS losses in 2022. See more about WS in Chapter 4.

EXCESS BUSINESS LOSS LIMITATION

In 2018, TCJA introduced an excess business loss (EBL) limitation. TCJA also repealed NOL carrybacks (except for farmers) and limited NOL carryforwards to 80% of the subsequent year’s taxable income. Add EBL over the threshold to the NOL carryforward.

The 2020 CARES Act 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 more about EBL and its thresholds in Chapter 2.

TAX TREATMENT ON FINANCIAL PRODUCTS

There are complexities in sorting through different tax-treatment rules and tax rates. It often takes work to tell what falls into each category. To help our readers with this, we cover the many trading instruments and their tax treatment in Chapter 3. Here’s a brief breakdown.

Securities have realized gain and loss treatment and are subject to WS rules and the $3,000 per year capital loss limitation on individual tax returns. Realization means income or loss when sold instead of mark-to-market (MTM) accounting. A Section 475 MTM election on securities avoids this issue.

Section 1256 contracts — including regulated futures contracts on U.S. commodities exchanges — are marked to market by default, so there are no wash-sale adjustments, and they receive lower 60/40 capital gains tax rates. Most TTS traders skip a Section 475 election on commodities to retain lower 60/40 capital gains rates.

Options have a wide range of tax treatments. An option is a derivative of an underlying financial instrument, and the tax treatment is generally the same. Equity options are taxed the same as equities, which are securities. Index options are derivatives of indexes, and broad-based indexes (stock index futures) are Section 1256 contracts. Simple and complex equity option trades have special tax rules on holding periods, adjustments, and more.

Forex receives ordinary gain or loss treatment on realized trades (including rollovers) unless a trader makes a contemporaneous capital gains election. In some cases, lower 60/40 capital gains tax rates on majors may apply under Section 1256(g).

Physical precious metals are collectibles; if a trader holds these capital assets for more than one year, sales are subject to the collectibles’ capital gains rate capped at 28%.

Cryptocurrencies are intangible property taxed like securities on Form 8949, but wash-sale loss and Section 475 rules do not apply because they are not securities.

Foreign futures are taxed like securities unless the IRS issues a revenue ruling allowing Section 1256 tax benefits.

ENTITIES FOR TRADERS

Entities can solidify TTS, unlock health insurance and retirement plan deductions, gain flexibility with a Section 475 election or revocation, prevent wash-sale losses with individual and IRA accounts, enhance a QBI deduction on Section 475 income less trading expenses, and provide a SALT cap workaround. An entity return consolidates trading activity on a pass-through tax return, making life easier for traders, accountants, and the IRS. Trading in an entity allows separation from individual investments.

An LLC with an S-Corp election is generally the best choice for a single or married couple seeking health insurance and retirement plan deductions.

A spousal-member LLC taxed as a partnership can segregate business trading from investments to perfect use of TTS and Section 475 and provide a SALT cap workaround, turning non-deductible state and local taxes as itemized deductions into tax-deductible business expenses. See Chapter 7.

RETIREMENT PLANS FOR TRADERS

TTS S-Corps can unlock a retirement plan deduction by paying sufficient officer compensation in December 2022 when results for the year are evident.

Consider a Solo 401(k) retirement plan with an 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). The Solo 401(k) also has a profit-sharing plan (PSP) up to a maximum of $40,500.

The IRS raised the 401(k) elective deferral for 2023 to $22,500 and the catch-up contribution to $7,500. See Chapter 8.

DEDUCTION ON QUALIFIED BUSINESS INCOME

In 2018, 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 be eligible for a 20% deduction on qualified business income (QBI).

Because TTS traders are considered a “specified service trade or business” (SSTB), taxable income above the following thresholds is not deductible: $340,100/$170,050 (married/other taxpayers) for 2022 and $364,200/$182,100 (married/other taxpayers) for 2023.

There is also a phase-out range above the threshold of $100,000/$50,000 (married/other taxpayers). The W-2 wage and property basis limitations apply within the phase-out range. TTS traders with an S-Corp usually have wages, whereas sole proprietor traders do not.

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

For more information, see Chapter 7 and Chapter 17.

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 29 states enacted SALT cap workaround laws.

Generally, elect to make a pass-through entity (PTE) payment on a partnership or S-Corp tax return filed by a 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, convert a non-deductible SALT itemized deduction (over the cap) into a business expense deduction from gross income.

DESK REFERENCE

Some readers use our guide as a desk reference to quickly find answers to specific questions. Others read this guide in its entirety. To accommodate desk-reference readers, we edit each chapter to stand alone, which inevitably means some chapters contain information covered in others.

Table of Contents

Highlights. 

Chapter 1  Trader Tax Status.

Chapter 2  Section 475 MTM Accounting. 

Chapter 3   Tax Treatment of Financial Products. 

Chapter 4  Accounting for Trading Gains & Losses. 

Chapter 5   Trading Business Expenses.

Chapter 6  Trader Tax Return Reporting Strategies.

Chapter 7  Entity Solutions. 

Chapter 8  Retirement Plans.

Chapter 9  Tax Planning.

Chapter 10  Dealing with the IRS and States.

Chapter 11  Traders in Tax Court.

Chapter 12  Proprietary Trading. 

Chapter 13   Investment Management.

Chapter 14   International Tax. 

Chapter 15  ACA Net Investment Income Tax. 

Chapter 16   Short Selling. 

Chapter 17  Tax Cuts and Jobs Act.

Chapter 18  CARES Act.

 

Green’s 2026 Trader Tax GuideGreen’s 2026 Trader Tax GuideAfter April 15 Sale — 20% Off GuideBuy Now
Welcome Message From Robert A. Green, CPA & CEO

In this 3-minute video, Mr. Green shows users around our website, and he explains how our CPA firm works closely with clients.