Day trading is more than nailing fast market moves. It also means navigating a complex tax environment that can catch even experienced traders off guard. Whether you’re full-time or part-time, the way the IRS classifies your trading activity affects what you can deduct, how your gains are taxed, and whether you’re exposed to costly rules like the wash sale.

Ascend’s Tax Supervisor, Randall Poe, takes us through 10 key things for day traders to know to avoid common pitfalls and maximize what they keep.

1. Investor vs trader: know the difference

The IRS makes a sharp distinction between investors and traders, and the classification comes with very different tax advantages. Investors face stricter limits on deductions and are subject to the wash sale rule. Traders, on the other hand, may deduct a broader range of expenses as their ‘business’, qualify for mark-to-market election, and gain more flexibility in how to handle losses.  

“If you’re buying and holding for the long haul, such as waiting on appreciation or dividends, you’re an investor,” Randall explains. “But if you’re trading substantially, frequently, and continuously to profit off daily market movement, then you may qualify as a trader,” he says.

For day traders who qualify for trader tax status, the benefits can be significant. Expenses that are non-deductible for investors, such as platform subscriptions, home office setups, internet, meals, and trading tools, can be treated as ordinary business expenses. That can mean significant savings. But it all hinges on the IRS viewing your activity as a legitimate trading business rather than personal investing.

Translation: Traders can treat their activity as a business. Investors cannot. So, before you file a form, figure out which category you belong to.

2. Time commitment: is this your 9-to-5?

The IRS doesn’t offer a clear definition of a ‘trader’, but time spent is a key clue.

“Ideally, you’re trading approximately 40 hours a week. It’s viewed as your full-time job,” Randall says. “You could possibly get away with trading four hours a day, so 20 hours a week. But, ideally, you want to see the numbers closer to 40.”

Think about it this way: if you’re squeezing in trades during your lunch break or before your 9 a.m. meetings, you’re not demonstrating the full-time commitment the IRS expects from a professional trader. You need to show that this is your primary occupation, not a weekend side hustle.

3. Consistency: are you trading all year?

The IRS doesn’t like flaky traders. Sporadic bursts of activity likely won’t get you trader tax status.

“You can’t be trading for one week and then take three weeks off,” says Randall. “They want to see continuous trading throughout the year.”

Randall adds that, don’t worry, this doesn’t mean you can’t take an annual vacation! But, your trading activity needs to span the full year with reasonable consistency. A week or two off for the holidays? Sure. Months-long breaks? Not if you want to keep your status.

4. Frequency: are you in the market daily?

Regularity counts.

“You’re in front of your computer, looking at the market, making regular trades daily,” Randall explains. “You’re not just trading one day a week, which leans more towards a hobby.”

The IRS expects day traders to engage with the market most business days, ideally at least four or five times a week. Trading one asset every other week is more likely to be seen as investing, not trading. Daily trades show intent, engagement, and profession-level seriousness.

5. Volume: are you making 1,000+ trades annually?

There’s no magic number in the tax code, but volume matters.

“The gold standard would be close to 1,000 trades per year. That breaks down to about 83-to-85 trades a month,” says Randall.

Why 1,000? Because it shows frequency, regularity, and dedication. Randall also shared that in one legal case (Poppe vs Commissioner), the court ruled 720 trades per year was sufficient to meet the volume criteria (albeit, ruled against Poppe for failure to meet the other requirements) when challenged by the IRS. But why flirt with the minimum? If you want to solidify your status in an ambiguous area, target four figures. It shows you’re not dabbling but doing business.

6. Claiming deductions: know what you can (and can’t) write off

Once you qualify as a trader, doors open. And by doors, we mean deductions.

“Let’s say you pay $200 a month on your trading platform; that’s $2,400 a year. If you’re an investor, that’s not deductible for you. But if you’re a trader, that is a deduction against your ordinary income,” Randall explains.

This extends to utilities, internet costs, financial data services, computer hardware, office furniture, and even meals. As Randall notes, “Anything you could justify that you’d need to carry on your trading habits would be a trader’s business deduction.”

But don’t get carried away. Keep excellent records. Save receipts. And remember: the IRS likes clean documentation, so appoint a knowledgeable tax advisor.

7. Understanding the wash sale rule

This is a big one and a common trap.

The wash sale rule disallows losses if you sell a stock and repurchase a ‘substantially identical’ one within 30 calendar days.

“That loss gets added to the cost basis of that substantially identical stock,” warns Randall. “The IRS created the rule to prevent taxpayers from artificially realizing losses just before year-end, only to jump back into the same position weeks later.”

If you’re an active trader, these disallowed losses of buying and selling similar stocks can pile up quickly, which can complicate your ability to manage taxable income and take advantage of losses. One way to avoid the wash sale restriction is by making the mark-to-market (MTM) election, covered in the next section. However, this step is not easily reversible and brings added tax complexity, so it’s worth evaluating carefully with a qualified tax advisor.

8. Mark-to-market election: an option with trade-offs

This IRS election, available only to those who qualify as traders, can significantly change your tax treatment.

“Mark-to-market election switches the character of your capital gains to ordinary income or ordinary loss,” Randall says. “So that annual cap restriction of $3,000 that you’re allowed to deduct against ordinary income? Now it’s non-existent.”

This means if you rack up $50,000 in losses during a rough year, you can deduct every cent against your other income. Under standard investor rules, you’d be stuck carrying the excess capital losses forward, maybe for years.

One of the biggest advantages of MTM? “With the mark-to-market election, that wash sale rule now gets eliminated,” Randall confirms.

But as Randall explains, MTM comes with a price: it’s not easy to back out of. “It’s essentially permanent. You must wait five years before it can be revoked,” he says. “After that, you can submit a request, but it’s not guaranteed they’ll revoke it.”

Also to consider, at the end of the year, the IRS treats your holdings as if they were all sold on December 31 at fair market value. Even if you haven’t hit the sell button, you’ll be recognizing gains (or losses) on your return.

MTM is powerful, but it’s not a one-size-fits-all solution. If you decide to make an MTM election, notify your brokerage provider and they’ll amend the reporting and remove any wash sales from the 1099 form at year-end.

9. Consider setting up an LLC or S Corp

Once you’re claiming business deductions as a trader, structure becomes important. Filing them under your personal Schedule C might work, but it could also trigger scrutiny.

“That Schedule C is going to show a loss because no income is going to be reported there,” Randall explains. “A loss from a Schedule C, especially year after year, is a red flag to the IRS.”

Instead, consider creating an LLC taxed as a partnership or an S Corp. “This somewhat removes scrutiny of your Schedule C. And if you do want to get away from mark-to-market election, all you have to do is dissolve the entity, rather than asking for the IRS’ permission for the election to be revoked.”

Assess if an entity model aligns with your tax strategy to help with optics, provide you with operational flexibility, offer legal separation, and give your training business legitimacy.

10. Year-End Tax Prep: Don’t Coast into December 31

Whether you’re MTM or not, December 31 is an important checkpoint.

“As mentioned above, MTM election treats your holdings as hypothetically sold on December 31,” Randall says. “The IRS assumes you theoretically sold that stock for whatever the fair market value is on that date. It would be wise to know what the value of your stock is at that time, or just sell your positions before December 31 and then rebuy.”

Why does this matter? Because unrealized gains or losses will now appear on your tax return if you’re using MTM. And if you’re not ready with those numbers, you’ll be scrambling come tax season.

Do yourself a favor: reconcile your books early, check your positions before the year closes, and get your records in order. Future you will be grateful.

Final thoughts: trade fast, file smart

In trading, milliseconds can mean money. In taxes, missteps can mean penalties or missed opportunities. Whether you’re a seasoned trader or just beginning to scale your strategy, mastering the tax landscape is essential.

As Randall puts it: “If you’re trading in high volume and high frequency, one thing to consider would be trader tax status.”

And if you go that route? Ensure you’re covered. “If ever challenged, the IRS could disallow those deductions... and assess penalties and interest.”

You’re not just competing with the market. You’re managing a business. So trade with confidence and file like a champion.

Contact us for your tax strategy: info@ascendadvisors.com