Attention Day Traders

June 11th, 2025 at 6:28 AM

Stock traders who seek to earn profits by frequently buying and selling stocks to capitalize on daily market movements can qualify as day traders for tax purposes.

Day traders are in the business of buying and selling securities—in other words, they are businesspeople, not investors.

There are many tax advantages to qualifying as a day trader instead of as a passive investor:

• Your trading expenses are fully deductible as business expenses from both your trading income and non-trading income, such as W-2 income. These include home office expenses, business property such as computers and software, seminars and other educational materials, subscriptions, and other miscellaneous expenses. Traders may also fully deduct margin interest as business interest—a substantial deduction for many traders.
• If you’re a trader, you can elect to use mark-to-market accounting, which allows you to treat trading gains and losses as ordinary income and losses, rather than as capital gains and losses. Investors can’t do this.
• You don’t have to pay self-employment tax on your trading income (this is also true for investors in securities).

How do you qualify as a day trader for tax purposes? There are two tests you must pass: the trading test and the substantial activity test.

• Trading test. You must seek to profit from daily market movements, not from dividends, interest, or capital appreciation. Your typical holding period for securities absolutely must be 31 days or less—usually much less. You must also make frequent trades: 720 trades per year, 60 trades per month, and 16 trades per week is a bare minimum—most day traders trade more than this.
• Substantial activity test. Your trading activity must be substantial, continuous, and regular. You don’t have to work full-time at trading, but it should be the primary way you earn income. You should trade throughout the year. The more you trade, the more you’ll look like a day trader.

As with any activity that you want the IRS to view as a business, you should behave in a serious, businesslike manner: keep good business records; study securities trading; and have all necessary computers, software, and other equipment to trade effectively.

Some day traders form S corporations to enjoy tax-free employee benefits such as a 401(k) and deductible health insurance. However, these benefits will be meaningful only if your trading business earns a profit.

Mark S. Fineberg, CPA