Josh Mullins
May 12, 2025
First, let’s set the big difference between someone who buys and sells stocks as an investor and someone who is interested in being a day trader. For those who are buying and selling as an investor and who tend to have a buy-and-hold mentality with the expectation that their holdings over time will pay dividends, increase in value, or ideally both, the tax treatment applied when selling some of these holdings would fall under short-term or long-term capital gains.
Short-term capital gains are gains from the sale of these holdings when you have held them for less than a year. These gains are taxed as ordinary income at whatever your tax rate is. Long-term capital gains are gains from the sale of these holdings you have owned for more than a year. Depending on your level of income, these can be taxed anywhere from 0% to 20%.
If your capital losses exceed your capital gains, you can deduct up to $3,000 of the excess loss against other income per year ($1,500 if married filing separately). The remainder can be carried forward to future years.
For those interested in being a day trader and who appropriately make the mark-to-market election, the strategy is to increase your trading activity to the level that it qualifies for ordinary income/expense tax treatment. This could lead to your investment expenses being tax deductible. You may be able to deduct other expenses related to managing your day trader status. This may sound like running a business—and in many ways, it is. However, a key difference is that trading gains are not subject to self-employment tax. Keep in mind that the net gains are still subject to net investment income tax.
This strategy applies to people who are trading for themselves. If you earn income from advisory services, trading education, or management fees, you are stepping outside of the day trader status. The IRS considers several key factors when determining eligibility for trader tax status, including:
- The amount of activity you have must be substantial.
- The frequency of and dollar amount of trades during the year.
- Does this activity provide income for your livelihood?
- The amount of time you spend on this activity.
-What is your holding period for securities bought and sold?
These criteria should be carefully reviewed when evaluating whether this tax strategy is appropriate. It is also critical to make a timely and valid mark-to-market election under IRC §475(f) if pursuing this path.