Trader tax status is the ticket to tax savings.
Trader tax status (TTS) constitutes business expense treatment and unlocks meaningful tax benefits for active traders who qualify. 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. TTS traders can also elect and set up other tax breaks—like Section 475 MTM, employee-benefit plans (health and retirement), and a SALT cap workaround—on a timely basis.
Qualifying for TTS means a trader can usebusiness treatment fortrading expenses.Business expenses include home office, education, Section 195 startup expenses, Section 248 organization expenses, margin interest, tangible property expense, Section 179 (100%) or 100% bonus depreciation, amortization on software, self-created automated trading systems (Section 174), seminars, market data, stock borrowing fees, and much more. If TTS business expenses and home office deductions are $20,000 and the taxpayer’s federal and state tax bracket is 40%, income tax savings are about $8,000.
Securities traders with TTS should consider a timely election of Section 475 ordinary gain or loss treatment, due by April 15, 2024, for individuals and March 15, 2024, for existing partnerships or S-Corps. A 2023 Section 475 election was due by April 18, 2023, for individuals and March 15, 2023, for existing entities. I call Section 475 tax-loss insurance. It exempts securities trades from wash sale loss adjustments and the $3,000 capital loss limitation. Profitable 475 traders are eligible for the 20% qualified business income (QBI) deduction, whereas QBI excludes capital gains and losses. QBI has income thresholds and a cap for trading, which is a specified service trade or business (SSTB).
A TTS S-Corp unlocks deductions for health insurance premiums and high-deductible retirement plan contributions.
A TTS partnership or S-Corp can do the SALT cap workaround solution.
Go to “Explore Trader Tax Status” to learn about business expenses, how to qualify for TTS, the Section 475 election and benefits, and employee benefit plan deductions.
For more information, seeGreen’s Trader Tax Guide Chapter 1 on Trader Tax Status.
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