Trader Tax Status and the Section 475 Election
When frequent trading becomes a business for tax, what trader status does and does not change, and the mark-to-market election that turns capital losses into ordinary ones.
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
Someone who buys and sells securities frequently, continuously, and to profit from short-term price movements can be a trader in securities — a business — rather than an investor. Trader status lets trading expenses be deducted on Schedule C, and a separate mark-to-market election under Section 475(f) makes trading gains and losses ordinary.
On this page
Who qualifies as a trader?
| Factor | Trader | Investor |
|---|---|---|
| Frequency | Hundreds of trades a year, most trading days | Occasional |
| Holding period | Days or less | Months or years |
| Time spent | Substantial, like a job | Part-time monitoring |
| Intent | Profit from daily swings | Appreciation, dividends, interest |
| Regularity | Continuous through the year | Sporadic |
The Tax Court has denied trader status to people with a few hundred trades a year and to those who traded only part of the year. There is no bright-line number.
What does trader status change?
- Trading expenses — data, software, education, home office, margin interest — are deducted on Schedule C instead of being nondeductible investment expenses (an investor's margin interest is deductible only as itemized investment interest). Commissions are not deductible expenses for either; they are built into basis and sale proceeds.
- Gains and losses remain capital, with the $3,000 loss limit and wash sale rule, unless the mark-to-market election is made.
- Trading gains are not self-employment income either way, so there is no self-employment tax — and no basis for retirement plan contributions from trading gains unless the trader is paid through an entity.
What does the Section 475(f) election do?
| Feature | With the election |
|---|---|
| Character | All trading gains and losses are ordinary |
| Losses | Fully deductible against other income; no $3,000 cap; losses create net operating losses |
| Wash sales | Not applicable to trading positions |
| Year-end | Open positions are marked to market — treated as sold at fair market value on the last business day of the tax year |
| Long-term capital gains | Lost on trading positions; investment positions held separately keep capital treatment |
| Deadline | Election statement due by the original due date, without extensions, of the return for the year before the election year — April 15, 2026, for an individual's 2026 election; a new taxpayer that was not required to file a prior-year return (such as a newly formed entity) places the statement in its books within 2 months and 15 days after the first day of the election year |
| Method change | Form 3115 (automatic change, designated change number 64) filed with the election-year return, with any Section 481(a) adjustment — not required if the election year is the first year the trader holds securities |
| Revocation | A notification statement by the same original-due-date deadline plus Form 3115 — automatic after five years, but within five years of the election it needs the non-automatic (IRS consent, user fee) procedure |
Why use an entity?
Traders often form an LLC or S corporation so the entity can make the election on its own timeline, pay the trader a salary that supports retirement plan contributions and health insurance deductions, and separate trading from personal investing. The entity structure does not create trader status on its own; the activity must still qualify.
Frequently asked questions
Can I elect mark-to-market for cryptocurrency trading?
Section 475(f) covers securities and commodities; the IRS has issued no guidance treating digital assets as either for this purpose, so an election for crypto trading is uncertain at best.
If I have a full-time job, can I still be a trader?
Possibly, if the trading is itself substantial and continuous; a full-time job makes the case harder.
Do I lose the 60/40 treatment on futures?
No. Section 1256 contracts such as regulated futures are not securities for Section 475, so they keep 60/40 treatment (60 percent long-term, 40 percent short-term) under a securities election; only a separate commodities election under Section 475(f)(2) would make them ordinary.
What happens to my long-term investments under the election?
Identify them as investment positions in your records on the day acquired; they stay capital and outside mark-to-market.
Official sources
The IRS explains: “As a trader, you must make the mark-to-market election by the due date (not including extensions) of the tax return for the year prior to the year for which you intend the election to become effective.” — Internal Revenue Service, Topic no. 429, Traders in securities (information for Form 1040 or 1040-SR filers), https://www.irs.gov/taxtopics/tc429
The statute provides that an electing trader in securities: “shall recognize gain or loss on any security held in connection with such trade or business at the close of any taxable year as if such security were sold for its fair market value on the last business day of such taxable year” — Legal Information Institute, Cornell Law School, 26 U.S. Code § 475 - Mark to market accounting method for dealers in securities, https://www.law.cornell.edu/uscode/text/26/475
Next step
Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. Our U.S. Tax Desk evaluates whether the activity meets the trader tests and files the election before the April deadline. See pricing or book a free fit call.
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