We cannot advise on individual tax matters, but we have put together the following general information and a list of references that you may find helpful.
The IRS recognizes that day traders have a special situation, with typically dozens, or even thousands of trades a month using some systems. You can therefore do one or all of the following:
File for Trader Status, which provides many advantages,
Use Mark-to-Market accounting, which provides more benefits, and finally,
Establish a trading business, which provides perhaps the most advantages of all.
If you elect to file with Trader Status, and Mark-to-Market accounting, there are several general advantages and disadvantages summarized here:
The Wash Sale Rule does not apply!
No $3,000/year limit on deductibility of trading losses.
No 2% threshold for deductible investment expenses.
No limit on investment interest deductibility. (Margin interest fully deductible.)
No self-employment tax.
Unrealized Gains and Losses held at year end must be counted.
Old Capital Loss Carryforwards may be trapped on Schedule D.
For a summary of the rules on Trader Status, see:
The actual rules are page 73 ("Special Rules for Traders in Securities") of IRS Publication 550: http://www.irs.gov/pub/irs-pdf/p550.pdf
NOTE: To elect Mark-to-Market accounting for 2012, you must file a statement to that effect with your 2011 taxes or with your extension request by April 15, 2012.
You may also want to form an entity, or a business, through which you will do your trading. There are many advantages to this. See:
