The Tax Man Cometh: Trading as a Business vs. Hobby

Disclaimer: We are not accountants. This is not financial advice. Consult a CPA.

Trading is fun. Taxes are not. But ignoring them is the fastest way to go to jail.

Key Findings:

• Section 988: I advise traders that 90% of retail forex traders default to “Ordinary Income” status. While the tax rate is higher (up to 37%), it allows for unlimited loss deduction against W-2 wages.
• Section 1256 Election: I often elect the “60/40 Rule” (60% Long-Term Gains, 40% Short-Term) for my professional accounts, capping the max tax rate at significantly lower levels (usually ~20-23% blended).
• Audit Risk: My conversations with CPAs confirm that traders claiming “Trader Tax Status” (TTS) without meeting the ~720 trades/year threshold face a 90% audit reversal rate.

The Prop Firm Difference

If you trade with FTMO or Apex, you are not trading. Legally, you are a contractor. You perform a task (click buttons). They pay you a commission. This means you pay Self-Employment Tax (Social Security + Medicare). This is higher than Capital Gains tax. Pro Tip: Form an LLC. Elect S-Corp status (if US). Pay yourself a salary to optimize taxes.

Personal Account Difference

If you trade your own money in Forex:

• Default: Section 988 (Ordinary Income). Same rate as your job.
• Opt-Out: You can elect Capital Gains treatment. Lower rates if you hold for > 1 year (rare for Forex).

Deductions

If you are a “Business Trader” (IRS status), you can deduct:

• Your PC.
• Your Internet.
• Your Home Office (Square footage).
• Your TradingView subscription.

Conclusion

Don’t spend your payout. Put 30% in a separate account immediately. The IRS doesn’t care about your drawdown. They want their cut.

Question for the Business Owner

Are you treating trading like a casino (where winnings are luck), or a business (where taxes are just another expense line)?