Are you a day trader? You may be eligible for Trader Tax Status (TTS) if so. TTS is a special tax designation that can save you a lot of money come tax time. This blog post will take a quick look at the benefits of trader tax status.
What is Trader Tax Status?
Trader Tax Status is a special tax designation that allows qualified traders to deduct certain business expenses from their taxes. To qualify for TTS, you must meet specific criteria, including carrying on business as a trader in securities, commodities, or derivatives; deriving a substantial portion of your income from trading activities; and working full time in the trade or business of trading.
If you meet the above criteria, you can use TTS by deducting your business expenses on Form 1040 Schedule C (or related business return) with the IRS. Once you have TTS, you will be able to deduct certain business expenses from your taxes, such as:
- Home office expenses
- education and training expenses
- travel expenses
- computer and internet expenses
- broker fees
- legal and accounting fees
- market data fees
- software expenses
You can also elect to treat your capital gains and losses under section 475(f) mark-to-market. This is a time based election and must be done directly. Information on how to do this can be found here. If you are deemed a mark-to-market trader all of your gains and losses are reported on a form 4797 (instead of a schedule D and form 8949). The benefits of section 475(f) include full loss treatment (instead of capital losses) and no more wash sales. All positions as of 12/31 are marked-to-market.
How Can I Save Money with Trader Tax Status?
Save money with TTS by taking advantage of deductions for business expenses that would ordinarily not be deductible. For example, say you spend $5,000 on market data every year. With TTS, you can deduct that $5,000 from your taxes, which could save you thousands of dollars every year.
Applying for Trader Tax Status can save day traders a lot of money come tax time by allowing them to deduct certain business expenses from their taxes. If you think you might be eligible for TTS, talk to your accountant or tax advisor about whether or not it makes sense for you to apply.