Trader Tax Status (TTS) & Section 475(f) Election Services

What Is Trader Tax Status (TTS)?

Trader Tax Status is an IRS classification that treats your trading activity as a business rather than passive investing. Most cryptocurrency and securities traders are classified as "investors" by default, subject to:

• $3,000 annual capital loss limitation

• Wash sale rules (for securities)

• No business expense deductions

 

With TTS qualification, traders can:

• Deduct unlimited trading losses as ordinary business losses

• Claim business expense deductions (home office, equipment, data subscriptions)

• Elect Section 475(f) mark-to-market accounting to eliminate wash sale rules

 

Important: TTS gains and losses are NOT subject to self-employment tax.

 

What Is Section 475(f) Mark-to-Market?

Section 475(f) is an IRS election allowing qualified traders to use mark-to-market accounting. Under this method:

• All open positions are marked to fair market value on December 31

• Gains and losses are treated as ordinary income/loss (not capital)

• Wash sale rules do not apply

• There is no $3,000 loss limitation

 

Example: If you have $50,000 in trading losses, an investor can only deduct $3,000 per year (carrying forward the rest over 15+ years). A 475(f) trader deducts the full $50,000 immediately against W-2 income, potentially generating a tax refund.

 

Do You Qualify for TTS? The IRS Test

The IRS evaluates TTS eligibility based on court precedent (Poppe, Chen, Endicott) using these criteria:

1. Short-Term Profit Intent

Your primary goal must be profiting from daily or weekly price movements—not long-term capital appreciation.

 

2. Substantial Trading Activity

While no statutory minimum exists, IRS guidance and case law suggest 750+ trades per year demonstrates substantial activity. Quality matters too: consistent, strategic trading carries more weight than sporadic gambling.

 

3. Regular and Continuous Trading

Trading must occur almost daily throughout the year. Extended gaps (weeks or months without trades) can disqualify you.

 

4. Significant Time Commitment

You must spend substantial time on trading activities—research, analysis, execution, and portfolio management.

 

Critical: Section 475(f) Election Deadlines

You cannot elect mark-to-market retroactively after seeing your losses at year-end.

• Existing Individual Taxpayer: April 15 of the tax year you want the election effective (Example: To use 475(f) for 2026, file election by April 15, 2026)

• New LLC or Partnership: Within 75 days of formation (Form entity in March 2026 → elect by late May 2026 for 2026 tax year)

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The new entity workaround: If you missed the individual deadline, forming a new LLC/Partnership allows a mid-year 475(f) election. This is the only way to obtain TTS treatment for the current year after April 15.

 

Benefits of Trader Tax Status

Unlimited Loss Deductions

Mark-to-market losses are ordinary losses, deductible in full against wages, business income, and other income sources. No $3,000 annual cap.

 

Wash Sale Exemption

Traders with a valid 475(f) election are exempt from wash sale disallowance rules. You can sell a position at a loss and repurchase immediately without losing the deduction.

 

Business Expense Deductions

TTS traders deduct trading-related expenses on Schedule C:

• Home office (dedicated trading space)

• Computer equipment and monitors

• Trading software and data subscriptions

• Market research and education

• Professional fees (CPA, legal)

 

Types of Traders: Where Do You Fit?

• Day Traders (Minutes to hours holding period): Likely qualifies if volume is substantial

• Swing Traders (Days to weeks holding period): May qualify depending on frequency

• Position Traders (Weeks to months holding period): Unlikely to qualify

• Investors (Months to years holding period): Does not qualify

 

Our TTS Consultation Services

1. Eligibility Assessment: Review of your trading logs against IRS criteria

2. Entity Formation Guidance: Advising on LLC formation to secure elections

3. 475(f) Election Filing: Preparing and filing the required election statement

4. Form 4797 Preparation: Handling "Sales of Business Property" forms for MTM traders

5. Audit Defense Documentation: Creating contemporaneous records supporting TTS

 

Audit Risk Disclosure

TTS is a high-audit area. The IRS scrutinizes trader status claims because the tax benefits are significant. Successful TTS claims require:

• Detailed trading logs with timestamps

• Contemporaneous documentation of trading intent

• Evidence of time spent on trading activities

• Properly filed election statements

 

Monaco CPA helps you build an audit-ready file from day one.

 

Frequently Asked Questions

Can I qualify for TTS if I have a full-time job?

Yes, but it's harder. You must demonstrate that trading is a separate, substantial business activity—not casual investing alongside your employment. The IRS will scrutinize time spent and trading frequency more closely.

 

Does TTS apply to cryptocurrency trading?

Yes. Cryptocurrency qualifies for TTS and Section 475(f) elections. Note: Wash sale rules currently do not apply to crypto (unlike securities), but TTS still provides valuable business expense deductions and eliminates the $3,000 loss cap.

 

What if I miss the April 15 deadline?

For individual taxpayers, you cannot elect 475(f) retroactively. However, forming a new LLC or Partnership allows an election within 75 days of formation—this is the only mid-year path to TTS.

 

Is TTS worth the audit risk?

For traders with significant losses or high trading volume, TTS can save tens of thousands of dollars annually. The key is proper documentation and professional guidance to support your position if questioned.

 

Stop Wasting Your Trading Losses

Don't let the $3,000 loss cap trap your capital. Qualify for Trader Tax Status and deduct your losses in full.

 

Schedule a TTS Assessment →

 

Phone: (862) 320-9554
Email: Greg@MonacoCPA.CPA
Location: Livingston, New Jersey (serving traders nationwide)

 

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