For U.S. federal tax purposes, trader tax status (TTS) is a preferential tax treatment where day traders can deduct their ordinary and necessary business expenses against their gross income. 

To qualify for TTS, a U.S. taxpayer must generally meet the following requirements:

  • The taxpayer’s trading activity is substantial, regular, frequent, and continuous; and
  • The taxpayer must seek to catch swings in daily market movements and profit from those short-term changes. 

There are no hard-line rules regarding what it means to be a trader versus an investor for federal tax purposes. However, taxpayers should consider several factors when performing this analysis.

  1. Intention. A trader intends to make a full-time living as a day trader in the markets. They treat this activity as a business and not as a mere hobby or part-time activity to make some extra money. 
  2. Hours per Day. Because traders treat this operation as a full-time job, most traders spend 40 to 50 hours a week on trading and research. 
  3. Volume of Trades. Recent tax court cases suggest that traders should executive at least 720 total trades per year. The industry standard is traders should execute at least 1,000 trades per year.  
  4. Holding Period. Traders make money by moving into and out of positions on a short-term basis. Most traders enter and exit their positions on the same trading day. However, some swing traders will hold their positions for longer periods. The IRS has commented that the average holding period for a position should be 31 days or less if a person wants to qualify for TTS.