How are day trading profits and losses taxed in 2025?

Day trading profits are taxed as short-term capital gains at your ordinary income tax rate (10-37%), since positions are held for less than one year. This is significantly higher than long-term capital gains rates (0-20%).

Reporting: Report each trade on Form 8949 and summarize on Schedule D. Your broker provides Form 1099-B with transaction details. If you have hundreds or thousands of trades, you can attach a summary statement and use "Various" for dates.

Trader Tax Status (TTS): If you qualify as a trader (not just an investor), you can elect Mark-to-Market accounting (Section 475(f)). Benefits include: all gains and losses are treated as ordinary income/loss (not capital), the $3,000 net capital loss limitation does not apply, and wash sale rules do not apply. To qualify, the IRS looks at frequency of trades, holding periods, time devoted, and whether trading is your primary income source.

How to elect Mark-to-Market: You must file an election statement with your return by the due date (including extensions) of the tax return for the year BEFORE you want the election to take effect. For a new taxpayer, the election must be made within 75 days of starting to trade. Attach a statement to your return and file Form 3115 (Change in Accounting Method). This election is binding for future years unless revoked with IRS consent.

Business expense deductions with TTS: Traders with TTS can deduct trading-related expenses on Schedule C: computer equipment, market data subscriptions, trading software, education, and home office. Without TTS, these are not deductible (the TCJA eliminated investment expense deductions for non-traders).

Net capital loss limit: Without TTS, if your losses exceed your gains, you can only deduct up to $3,000 per year against other income ($1,500 MFS). Excess losses carry forward indefinitely.