If you trade actively enough that the activity rises to the level of a trade or business, two related but distinct tax positions become available: trader tax status (TTS) and the IRC §475(f), “Election of mark to market for traders in securities” mark-to-market election. They are commonly conflated, and they should not be. TTS is a factual status that unlocks business-expense deductions on Schedule C; the §475(f) election is a separate accounting choice that converts trading gains and losses to ordinary income subject to mark-to-market accounting. Both are available to qualifying traders; neither is appropriate for a typical buy-and-hold investor.
Trader Tax Status (TTS). TTS is not an election but a determination based on the facts and circumstances of your activity. The IRS has no bright-line test, and the characteristics that matter are well established: a short typical holding period (intraday to a few weeks), high trading frequency and dollar volume (hundreds to thousands of trades per year on a meaningful fraction of trading days), substantial time devoted to trading (effectively a part- or full-time occupation), and a genuine intent to profit from short-term price movements rather than long-term appreciation or dividends. Someone who places fifty trades a year and holds positions for months is an investor; someone who places fifteen hundred trades a year, watches the market several hours daily, and earns a meaningful share of total income from trading is a candidate for TTS.
The consequence of qualifying is that trading-related ordinary-and-necessary expenses — data feeds, trading software, professional subscriptions, a dedicated office, hardware, relevant continuing education — become deductible on Schedule C against trading-business income, the same way any other business deducts its operating costs. Without TTS, those expenses are nondeductible miscellaneous itemized deductions that the TCJA eliminated through 2025 and that OBBBA preserves at zero through 2028. The deduction asymmetry alone makes TTS materially valuable to an active trader.
A non-obvious second benefit: trading gains do not generate self-employment income. The IRS and the Tax Court have consistently treated a trader’s gains — including ordinary gains under §475(f) — as outside the definition of earnings from self-employment under IRC §1402. Your Schedule C therefore reports the expense side of the trading business with no corresponding 15.3% SE-tax drag on profits. The asymmetric consequence is that trading gains cannot directly fund a solo 401(k), SEP-IRA, or defined-benefit plan — those require earned income. The entity wrapper discussed below exists precisely to manufacture that earned income.
TTS by itself does not change the character of trading gains and losses. You still report individual securities transactions on Schedule D and Form 8949, the wash-sale rule still applies, and capital losses are still capped at $3,000 per year against ordinary income. The Schedule C captures the expense side of the trading business; the trading results continue to flow through Schedule D unless you separately make the §475(f) election.
The §475(f) mark-to-market election. Section 475(f) lets a qualifying trader in securities (or commodities; the two are separate elections) treat all positions held in the trading business as if sold for fair market value on the last business day of the year. The consequences are substantial:
The trade-offs are real. You lose preferential long-term capital-gains treatment on any position the trading business holds at year-end, which means the election typically makes sense only for traders who hold nothing meaningfully long-term in the trading account. You also pay tax on unrealized gains every December, accelerating the tax bill relative to a buy-and-hold posture. The election is hard to undo: revoking it requires IRS consent under Rev. Proc. 99-17, and the IRS grants consent reluctantly.
Investor-account segregation. §475(f) marks only positions held in the trading business. You can — and should — maintain a separately identified long-term investment account, documented at acquisition as held for investment rather than as inventory of the trading business. Positions in that account retain capital-asset character, LTCG treatment, and qualified-dividend rates; the mark-to-market regime never touches them. The identification must be contemporaneous and consistent — a casual “this one’s for the long term” note added to the records after the fact does not survive scrutiny. Done properly, segregation is the single largest mitigation for the LTCG-stripping problem above, and it is the reason most TTS traders run two accounts at the same broker: one trading, one investing, with the line drawn before the position is opened.
§1256 contracts are a separate election. Securities and commodities are distinct §475(f) elections. A trader who elects only over securities still receives the 60/40 split of IRC §1256 on regulated futures, broad-based index options, and other §1256 contracts. Do not elect over the commodities book unless you mean to: 60/40 is one of the most favorable structural treatments in the Code, and §1256 contracts already mark-to-market by statute and never trigger wash-sale rules, so the marginal benefit of an election over them is small while the cost — giving up the 60%-LTCG component — is large.
Election mechanics. The deadline trips most people who do not have a tax professional running the process. The §475(f) election for a given tax year must be filed by the original due date (no extensions) of the prior year’s return — in practice, by April 15 of the year for which you want the election first to apply. You attach a statement to that prior-year return (or to the Form 4868 extension request for it) identifying that you are making an election under §475(f), the first tax year for which it is effective, and the trade or business to which it applies. Separately, in the first year the election is in effect, you file Form 3115 (Application for Change in Accounting Method) reflecting the IRC §481 adjustment for the change from realized to mark-to-market accounting.
The entity wrapper. Active traders frequently run the business through a wholly owned S-corporation or an LLC taxed as a partnership, for two reasons. First, the entity can pay the trader a salary or guaranteed payment, which creates the earned income that trading gains do not — which then funds a solo 401(k), SEP-IRA, or defined-benefit plan, generating ordinary deductions on the order of $70,000 per year and substantially more once a cash-balance plan is layered on top. Second, the entity formalizes the trade-or-business posture and makes the TTS factual case materially easier to defend on audit. The friction is real: payroll administration, a separate federal and state return, and the salary itself is subject to FICA. The math works when the trading book is large enough that the retirement-plan contributions and audit-defense optionality exceed the payroll overhead — broadly, a several-hundred-thousand-dollar account or larger, and rarely below.
Who this is and is not for. The combination of TTS plus §475(f) is designed for an active short-term trader who trades a meaningful book (commonly $1M+ at minimum and often much more), holds positions for days or weeks rather than months, has years where wash-sale rules destroy deductible losses, and has no need to hold long-term-capital-gains positions inside the trading account. For that profile, the wash-sale escape and the uncapped ordinary-loss treatment in losing years more than pay for the acceleration of tax on unrealized gains. For the typical investor with a long-term equity book plus occasional active trades, the election is the wrong tool — it strips LTCG treatment from positions you meant to hold long and accelerates tax on every unrealized gain. The fact-and-circumstances qualification standard for TTS is also vague enough that an asserted but weak claim invites audit; for any meaningful adoption, get a written position from a CPA or tax attorney experienced in trader taxation before you file.