Taxes in Trading: The Silent Drawdown

1. The Wash Sale Nightmare

This is the most common way traders accidentally bankrupt themselves. It was designed to prevent people from selling a stock to claim a tax loss and then immediately buying it back.

The Mechanism

The Rule: If you sell a security at a loss and buy a "substantially identical" security within 30 days (before or after), the loss is disallowed.
The Danger: You lose $50k on Tesla. You buy Tesla back the next day. You make $50k profit later. Result: You owe taxes on the $50k profit, but you CANNOT deduct the $50k loss. You effectively profited $0 but pay taxes on $50k.
The Fix: If you take a loss, do not touch that ticker for 31 days. Trade a competitor instead (e.g., Sell TSLA, buy RIVN).

2. Trader Tax Status (TTS)

The IRS distinguishes between an "Investor" and a "Trader." This distinction is not a choice; it is based on facts and circumstances.

The Investor (Default)

Deduct losses only up to $3,000 against ordinary income.
Wash sales apply permanently.
Expense deductions (data fees, software, home office) are severely limited or non-existent.

The Trader (Business)

Business expense deductions allowed (home office, Bloomberg terminal, education).
Qualification: You must trade substantial volume (4+ trades/day), frequency (4 days/week), and seek short-term swings from daily market movements, not long-term appreciation.

3. Section 475 (Mark-to-Market)

If you qualify for TTS, you can elect Section 475 MTM accounting. This is the "Nuclear Option" for serious traders.

The Benefits

Benefit 1: Wash Sale rules NO LONGER APPLY. You can trade TSLA every second of the day without fear.
Benefit 2: Unlimited loss deduction against wage income. If you lose $100k trading, you can deduct that $100k from your W2 salary (unlike the $3k limit for investors).

The Catch

You must file this election by April 15th of the *current* year to use it for the *next* year. It is strictly enforced. If you miss the deadline, you are stuck as an investor for another year.

4. Entity Structure (LLC)

Trading under your personal name exposes your personal assets and complicates accounting.

The Corporate Shield

The Strategy: Form an LLC (Limited Liability Company). Treat trading as a business. Open a corporate brokerage account.
Benefits: Professional look, easier segregation of funds, and ability to elect S-Corp status later for salary optimization (paying yourself a wage to reduce self-employment tax).

Conclusion: It's Not What You Make

It is what you keep. Consult a CPA who specializes in *traders*, not just general taxes. A general accountant will likely miss the Section 475 election window and cost you thousands. Treat your tax strategy with the same discipline as your entry strategy.