Mark-to-Market Election — Section 475(f)

This is the single most important tax decision a day trader makes. Without the Section 475(f) election, your trading gains and losses are capital gains and losses. That means the wash sale rule applies, losses are capped at $3,000 per year against ordinary income, and you’re stuck carrying forward unused losses indefinitely.

With the mark-to-market election, everything changes. All positions are treated as if they were sold at fair market value on the last business day of the year. Gains and losses become ordinary — not capital. That means no wash sale headaches, no $3,000 loss limitation, and full deductibility of trading losses against all other income.

The catch: you must make this election by the due date of the prior year’s return (typically April 15) for it to apply to the current year. If you started trading in January and didn’t file the election by April 15 of the prior year, you’re out of luck for the current tax year. We make sure new clients understand this timeline before their first full year of trading.

Trader Tax Status — Do You Qualify?

The IRS doesn’t have a bright-line test for who counts as a “trader” versus an “investor.” But the case law and IRS guidance point to several factors:

• Frequency and volume — you need to be making trades on most trading days, not just occasionally. Four or five trades a week probably isn’t enough. Dozens per day almost certainly is
• Holding period — day traders hold positions for hours or minutes, not weeks or months. If your average holding period is more than 30 days, you look more like an investor
• Profit motive — trading must be your primary income-producing activity, not a side hobby alongside a full-time job
• Continuity — you need to trade regularly and consistently throughout the year, not just during volatile markets

Qualifying as a trader (not just an investor) lets you deduct trading expenses on Schedule C, take the home office deduction, deduct data feeds and platform costs, and access the mark-to-market election. Without trader status, your expenses go on Schedule A — where they’re mostly useless after the 2017 tax reform eliminated miscellaneous itemized deductions.

Entity Structure for Active Traders

Many serious day traders operate through an LLC or S-corp for liability protection and tax flexibility. An entity election doesn’t automatically give you trader tax status, but it does create a clear business structure that supports your position if the IRS questions it.

An S-corp can also save on self-employment tax if you have consistent trading profits, since distributions to owners aren’t subject to SE tax. But the savings depend on your specific situation — an S-corp only makes sense once profits consistently exceed $80,000 to $100,000 after expenses. Below that, the additional filing and payroll costs eat into the benefit.

We help traders decide between sole proprietorship, single-member LLC, multi-member LLC, and S-corp based on their trading volume, profit level, and whether they have a spouse involved in the business.

New York State and City Tax Burden

Here’s what a profitable day trader in NYC actually pays. On $300,000 of trading income:

• Federal income tax — approximately $65,000 (24-32% effective rate depending on filing status and deductions)
• New York State — approximately $19,000 (rates up to 10.9%)
• New York City — approximately $10,000 (rates up to 3.876%)
• Net Investment Income Tax — $11,400 (3.8% on the amount above $200,000 for single filers, though mark-to-market income may avoid this)

Total: over $105,000 in taxes. That’s 35%+ before we’ve done any planning. With proper entity structure, retirement plan contributions (a solo 401(k) lets you defer up to $69,000 for 2024), and the mark-to-market election, we can bring that effective rate down meaningfully.

Crypto and Options Traders

Cryptocurrency trades follow different rules than equities. There’s no mark-to-market election available for crypto under current IRS guidance — crypto is treated as property, and every trade is a taxable event subject to capital gains rules. The wash sale rule didn’t apply to crypto before 2025, but starting January 1, 2025, digital assets are subject to wash sale rules under the updated IRS regulations.

Options trading has its own quirks. The tax treatment depends on whether you’re trading equity options, index options (Section 1256 contracts), or a mix. Section 1256 contracts get the 60/40 treatment — 60% long-term capital gains and 40% short-term, regardless of holding period. That’s a significant advantage over equity options, which are taxed based on actual holding periods.