Day Trading Taxes
Understand how your trading profits are taxed - from wash sale rules to the 60/40 futures advantage
How Day Trading Is Taxed
Day trading taxes can significantly impact your bottom line. In the United States, how your trading profits are taxed depends on what you trade, how often you trade, and whether you qualify for special tax status.
Stock day trading profits are generally taxed as short-term capital gains at your ordinary income rate (up to 37%). However, futures traders benefit from the "60/40 rule" which can substantially reduce your tax burden.
This guide covers the essential tax concepts every day trader needs to understand. Note: Tax laws are complex and change frequently. Always consult a qualified tax professional for advice specific to your situation.
Tax Treatment by Instrument
| Instrument | Tax Treatment | Effective Max Rate |
|---|---|---|
| Stocks (short-term) | Ordinary income rates | Up to 37% |
| Stock Options | Ordinary income rates | Up to 37% |
| Futures (Section 1256) | 60% long-term / 40% short-term | ~26.8% blended |
| Forex (Section 988) | Ordinary income (default) | Up to 37% |
| Forex (Section 1256 election) | 60/40 treatment available | ~26.8% blended |
| Cryptocurrency | Property (capital gains) | Up to 37% (short-term) |
The 60/40 Futures Tax Advantage
Under Section 1256 of the tax code, regulated futures contracts receive special tax treatment regardless of holding period:
- 60% of gains taxed at the long-term capital gains rate (max 20%)
- 40% of gains taxed at your ordinary income rate (up to 37%)
For a trader in the top tax bracket, this creates a blended rate of approximately 26.8% instead of 37%—a potential savings of over 10 percentage points.
| Annual Profit | Stock Tax (37%) | Futures Tax (~27%) | Savings |
|---|---|---|---|
| $50,000 | $18,500 | $13,400 | $5,100 |
| $100,000 | $37,000 | $26,800 | $10,200 |
| $250,000 | $92,500 | $67,000 | $25,500 |
Simplified example assuming top bracket. Actual taxes depend on total income and deductions.
The Wash Sale Rule
The wash sale rule prevents traders from claiming artificial tax losses. If you sell a security at a loss and buy the same (or substantially identical) security within 30 days before or after, the loss is disallowed for tax purposes.
This rule primarily affects stock and options traders. The disallowed loss is not lost forever—it is added to your cost basis in the new shares, deferring the tax benefit.
Affected by Wash Sales
Exempt from Wash Sales
Trader Tax Status (TTS)
What is Trader Tax Status?
TTS is an IRS designation for traders who trade frequently and substantially as a business. It allows trading expense deductions, avoidance of wash sales (with mark-to-market election), and other benefits.
Qualification Requirements
There is no precise IRS test, but factors include: trading frequently (daily or near-daily), spending substantial time trading, seeking short-term profits (not dividends), and trading being your primary activity.
Mark-to-Market Election
TTS traders can elect mark-to-market accounting (Section 475), which treats gains/losses as ordinary income but eliminates wash sale rules and allows trading losses to offset other income without the $3,000 capital loss limit.
Potential Trading Deductions
Home Office
Dedicated trading space may qualify for home office deduction (TTS required).
Data & Software
Trading platforms, data feeds, charting software, and research subscriptions.
Education
Trading courses, books, and seminars directly related to trading.
Equipment
Computers, monitors, and other equipment used for trading.
Internet & Phone
Business-use portion of internet and phone for trading.
Professional Services
Tax preparation, accounting, and legal fees related to trading.
Most deductions require Trader Tax Status. Consult a tax professional for eligibility.
Important Tax Disclaimers
This information is for educational purposes only:
Frequently Asked Questions
How is day trading income taxed?
Day trading profits from stocks are taxed as short-term capital gains at your ordinary income tax rate (10-37% in the US). Futures receive preferential 60/40 treatment (60% long-term, 40% short-term rates regardless of holding period).
What is the wash sale rule?
The wash sale rule disallows claiming a tax loss if you buy the same or substantially identical security within 30 days before or after the sale. The disallowed loss is added to the cost basis of the new shares.
Why are futures taxes better than stock taxes?
Futures receive 60/40 tax treatment under Section 1256: 60% of gains are taxed at the long-term capital gains rate (max 20%) and 40% at short-term rates, regardless of how long you held the position. This can result in significant tax savings.
What is trader tax status?
Trader Tax Status (TTS) is an IRS designation that allows active traders to deduct trading expenses, avoid wash sale rules, and potentially deduct losses against ordinary income. Qualification requires frequent, substantial trading activity.
Continue Learning
Risk Disclosure: Trading involves substantial risk of loss and is not suitable for all investors. This content is for educational purposes only and does not constitute financial advice.
Last updated: December 2025