Trading Taxes: Short-Term Gains, Wash Sales, Trader Status

Trading gains are taxable in the US, and the rules for active traders are different enough from buy-and-hold investing to catch people out. This guide covers how short-term and long-term gains are taxed, the $3,000 loss limit, the wash sale rule, how options and 60/40 contracts are taxed, and what trader tax status really requires.

This is general information about federal rules, not tax advice. Tax law changes, and your situation matters, so check the linked IRS pages and talk to a tax professional before you file.

Short-term vs long-term gains#

The holding period decides the rate. Per IRS Topic 409:

• Held one year or less: short-term. Net short-term gains are taxed as ordinary income, like wages. The IRS's 2026 rate schedules run from 10% to 37%.
• Held more than one year: long-term, taxed at 0%, 15% or 20%. For 2025 returns, Topic 409 lists 0% up to $48,350 of taxable income for single filers ($96,700 joint), 15% up to $533,400 ($600,050 joint), and 20% above that. The thresholds rise with inflation each year.

Most day and swing trades are short-term, so active traders usually pay their full income tax rate on gains. Your state may tax them too.

Losses and the $3,000 limit#

Losses first offset gains. If your losses are bigger, you can deduct up to $3,000 a year ($1,500 if married filing separately) against other income, and carry the rest forward to future years.

A simple example: $10,000 of short-term gains and $16,000 of short-term losses is a $6,000 net loss. You deduct $3,000 this year and carry $3,000 forward.

The wash sale rule#

A wash sale happens when you sell stock or securities at a loss and, within 30 days before or after the sale, you buy substantially identical stock or securities, or a contract or option to buy them. You can't deduct that loss then. Under the Schedule D instructions, it's added to the cost basis of the replacement shares instead, so in most cases it's deferred rather than lost.

Active traders hit this constantly, because they trade the same tickers over and over. Two points to know:

• It covers options. Buying a call on a stock you just sold at a loss can trigger it, and Schwab says the wash sale rules apply to stock option trades too.
• Your broker may not catch all of it. Brokers must report wash sales on Form 1099-B only when the sale and repurchase are in the same account, in covered securities with the same CUSIP number. Trades across two brokers, or in an IRA, are yours to track.
• An IRA repurchase is worse. The Schedule D instructions make an exception for replacement shares bought in an IRA or Roth IRA: the disallowed loss isn't added to their basis.

The forms: 1099-B, Form 8949 and Schedule D#

Your broker sends a Form 1099-B with your proceeds, cost basis, whether each sale was short- or long-term, and any wash sale losses it found. Sales go on Form 8949, and the totals go on Schedule D. If the 1099-B shows the basis was reported to the IRS and you have no adjustments, you can put the totals straight on Schedule D instead.

How options are taxed#

Options are covered in IRS Publication 550. At a high level, as Schwab's explainer summarizes it:

• Closed before expiration: a capital gain or loss. If you bought the option, the holding period decides short or long term. If you sold (wrote) it, the result is always short-term.
• Expired worthless: the buyer has a capital loss of the premium, short- or long-term depending on how long they held it; the writer has a short-term gain of the premium. The Schedule D instructions say to mark these "EXPIRED" on Form 8949.
• A call you exercise: the premium is added to the stock's cost basis. There's no tax until you sell the shares.
• A put you exercise: the premium reduces the amount you get for the shares you sell.
• Assigned on a call you wrote: the premium is added to your sale proceeds.
• Assigned on a put you wrote: the premium reduces the cost basis of the shares you buy.

New to how calls and puts work? Our options basics guide explains exercise and assignment.

Section 1256: index options and futures (60/40)#

Some contracts follow a separate rule. Form 6781 lists Section 1256 contracts as regulated futures, foreign currency contracts, nonequity options and certain dealer contracts. For these:

• gains and losses are treated as 60% long-term and 40% short-term, however long you held them;
• any contract still open on December 31 is treated as sold at fair market value, so open positions are taxed each year;
• a net loss can be carried back three years, if you elect it (corporations, estates and trusts can't).

Which options count? The tax code (section 1256(g)) defines a nonequity option as a listed option that isn't an equity option, and an equity option as an option to buy or sell stock, or one valued by reference to a stock or a narrow-based security index. So options on individual stocks are equity options and aren't on the list, unless they're dealer equity options held by an options dealer. They follow the regular rules above. Cboe says its index options, including SPX, qualify for 60/40. On a $10,000 net Section 1256 gain, $6,000 is taxed at long-term rates and $4,000 at short-term rates. Check how a product is classified before you count on 60/40.

Trader tax status#

Most people who trade a lot are still investors in the IRS's eyes. Under Topic 429, you're a trader only if you seek to profit from daily price movements (not dividends or long-term growth), and you trade on a substantial scale, with continuity and regularity. The IRS looks at your typical holding periods, the number and dollar value of trades, whether trading is your livelihood, and how much time you spend. Calling yourself a day trader doesn't decide it.

If you qualify:

• trading expenses, such as software, data and alert tools, go on Schedule C;
• gains and losses still go on Form 8949 and Schedule D, with the wash sale rule and $3,000 limit, unless you make the election below;
• trading gains aren't subject to self-employment tax.

The mark-to-market election (Section 475(f))#

A qualifying trader can elect mark-to-market accounting. Gains and losses then become ordinary, reported on Form 4797, and the wash sale rule and capital loss limits no longer apply. The timing is strict: you make the election by the original due date of the prior year's return (extensions don't count), with a statement attached to that return or to your request for an extension. To use it for 2027, the deadline is the original due date of your 2026 return. The IRS says late elections generally aren't allowed, and revoking one requires its own filing.

Estimated taxes#

Wages come with withholding; trading gains usually don't. Topic 409 notes that a taxable capital gain may mean making estimated payments. Under the 2026 Form 1040-ES rules, you generally must pay if you expect to owe at least $1,000 and your withholding covers less than 90% of this year's tax or 100% of last year's (110% if your adjusted gross income was over $150,000). The 2026 due dates are April 15, June 15 and September 15, 2026, and January 15, 2027.

A few practical tips#

1. Track wash sales yourself if you trade the same tickers at more than one broker.
2. Set money aside after a strong quarter if no tax was withheld.
3. Keep records of tools and subscriptions, in case you qualify as a trader.
4. Compare with other taxes you may owe. Our guides to reseller taxes and sports betting taxes cover the other income many OOSClub readers have.

Trading tools on OOSClub#

The stocks and options niche lists trading software: indicators, scanners and alert tools, with plans and refund terms. Our guide to trading indicators and algos explains how those tools work. We never publish a tool's results, and nothing on OOSClub is tax or financial advice.