How Is Day Trading Taxed? Rates, Wash Sales, and Elections

Day trading is taxed as ordinary income. Because positions open and close well inside a year, your profits are short-term capital gains, and short-term gains are taxed at the same federal rates as wages: 10, 12, 22, 24, 32, 35, and 37 percent in 2026. A 3.8 percent Net Investment Income Tax may apply on top if your income is high enough, and state income tax stacks on top of that. Several elections and rules — the wash sale rule, trader tax status, mark-to-market accounting, and the 60/40 treatment for futures and index options — can change what you actually owe.

The Rate That Applies to Your Profits

A security held one year or less produces a short-term capital gain when sold at a profit. The IRS taxes short-term gains at the graduated rates applied to ordinary income.¹ For 2026 those brackets run from 10 percent to 37 percent, applied progressively so only the income within each bracket is taxed at that bracket’s rate.

Your taxable gain for the year is total proceeds from all sales minus total cost basis, which includes commissions. You owe tax on the net figure even if the cash never leaves the brokerage. If losses exceed gains, you can deduct up to $3,000 of net capital losses against wages and other income ($1,500 if married filing separately); anything above that carries forward to future years with no expiration.²

Most states with an income tax treat short-term gains as ordinary income too, at rates ranging from roughly 2 percent to over 13 percent. A high-income trader in a high-tax state can face a combined marginal rate above 50 percent.

The 3.8 Percent Net Investment Income Tax

A separate 3.8 percent surtax, the Net Investment Income Tax, applies to the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds a fixed threshold.³ The thresholds:

$200,000 for single or head-of-household filers
$250,000 for married filing jointly
$125,000 for married filing separately

These figures are set by statute and are not indexed for inflation.⁴ Trading income is expressly included in net investment income, and the surtax applies even if you qualify as a trader in securities. It sits on top of your regular tax, so a top-bracket trader above the threshold can pay up to 40.8 percent federally before state tax.

The Wash Sale Rule Can Delay Your Losses

If you sell a security at a loss and buy a substantially identical security within 30 days before or after the sale, the loss is disallowed for that year.⁵ The full window is 61 days: 30 before, the sale date, and 30 after.

The disallowed loss is not lost; it gets added to the cost basis of the replacement shares and is recognized when those shares are eventually sold outside another wash sale. For a trader who cycles through the same tickers repeatedly, wash sales can compound and push loss recognition well into the future.

What Your Broker Tracks and What You Track

Brokers report wash sales on Form 1099-B only when the sale and repurchase occur in the same account and involve the same CUSIP.⁶ The rule itself still applies across different accounts, across brokers, and between you and your spouse’s accounts. Tracking those cross-account wash sales is your responsibility.

The costliest version of this trap runs between a taxable brokerage account and an IRA. Sell a stock at a loss in the taxable account, buy it back inside the IRA within the 61-day window, and the loss is disallowed. Because the replacement shares sit in a tax-advantaged account, the disallowed loss cannot be added to their basis, so the deduction can be permanently lost rather than merely deferred.

Qualifying as a Trader in Securities

The IRS separates investors from traders in securities. Investors hold for appreciation, dividends, or interest. Traders seek short-term price moves and trade frequently, regularly, and continuously through the year.⁷ There is no fixed trade count in the code; the IRS weighs how much time you put in, how many trades you execute, and whether trading is your main income source.

Meeting the standard, sometimes called trader tax status, does two things: it lets you deduct trading business expenses on Schedule C, and it makes you eligible for the mark-to-market election. Trading gains are not treated as self-employment income, so you do not owe the 15.3 percent self-employment tax on them.⁷

The Mark-to-Market Election

Traders in securities can elect mark-to-market accounting under Internal Revenue Code Section 475(f).⁸ The election changes three things:

Gains and losses become ordinary. You report them on Part II of Form 4797 instead of Schedule D.⁹
The $3,000 capital loss cap no longer applies, so you can deduct the full amount of a bad year against other income.²
Wash sale restrictions do not apply to positions covered by the election.⁷

All positions still open on the last day of the year are treated as sold at fair market value that day, and the resulting gain or loss is recognized whether or not you actually close the position.

Election Deadline

The election must be filed by the due date, without extensions, of the return for the year before the election takes effect.⁷ To elect for 2027, you attach a statement to your 2026 return or extension request by April 15, 2027. The statement must identify the election under Section 475(f), the first tax year it covers, and the trade or business involved.¹⁰ Miss the date and you generally wait a full year to try again; late elections are rarely granted.

Business Expense Deductions for Qualified Traders

A trader in securities reports business expenses on Schedule C, kept separate from the trading gains and losses themselves.⁷ Typical deductions include:

Home office expenses if a dedicated space is used exclusively and regularly for trading and is your principal place of business (a share of rent or mortgage interest, utilities, and insurance)
Computers, monitors, trading platforms, and market data subscriptions
Margin interest, fully deductible as a business expense for qualified traders rather than capped at net investment income
Trading education, and tax preparation fees tied to the trading activity

Investors who do not qualify as traders cannot claim these costs. The Tax Cuts and Jobs Act eliminated the itemized deduction for investment expenses, and that restriction remains in place for non-traders.

Futures and Broad-Based Index Options Follow a Different Rule

If you trade futures or broad-based index options, the tax treatment is not the ordinary-income treatment described above. Section 1256 contracts — regulated futures contracts, nonequity options such as broad-based index options, and certain other derivatives — follow a 60/40 split: 60 percent of the gain or loss is treated as long-term and 40 percent as short-term, regardless of how briefly you held the position.¹¹

With the long-term rate capped at 20 percent and the short-term rate topping out at 37 percent, the blended maximum federal rate on Section 1256 gains is roughly 26.8 percent. Open Section 1256 contracts are marked to market on the last business day of the year, so gains and losses are recognized annually. A net Section 1256 loss can be carried back three years to offset prior Section 1256 gains, an option not available for ordinary capital losses.¹²

Quarterly Estimated Tax Payments

Profitable trading income comes without withholding, so if you expect to owe $1,000 or more at filing, the IRS wants payments during the year. The 2026 quarterly due dates:¹³

First quarter (January through March): April 15, 2026
Second quarter (April through May): June 15, 2026
Third quarter (June through August): September 15, 2026
Fourth quarter (September through December): January 15, 2027

You can skip the January 2027 payment if you file your 2026 return and pay the balance in full by February 1, 2027.

Avoiding the Underpayment Penalty

The penalty accrues on each underpaid installment for every day it stays unpaid. Two safe harbors avoid it: pay at least 90 percent of the current year’s total tax, or pay 100 percent of the prior year’s total tax (110 percent if your prior-year adjusted gross income exceeded $150,000).¹⁴ Because trading income is volatile, many traders lock in the prior-year safe harbor and settle up at filing.

Forms and Records

Your broker issues Form 1099-B for every sale, listing proceeds and, for covered securities, cost basis.¹⁵ For each trade you need four data points: purchase date, sale date, cost basis, and proceeds.

If you report capital gains and losses the standard way, those details go on Form 8949, which reconciles your numbers with what the IRS received from your broker.¹⁶ Totals flow to Schedule D.¹⁷ If you elected mark-to-market, use Form 4797 Part II instead.⁹

Mismatches between your broker’s 1099-B and your return commonly draw automated IRS notices, most often because of wash sale adjustments one side tracked and the other did not. When you adjust a 1099-B figure on Form 8949, use the adjustment codes in column (f) to explain why. Keep brokerage statements and electronic trade logs at least through the statute of limitations on assessment, typically three years after filing.¹⁸

1
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
2
Office of the Law Revision Counsel. 26 USC 1211 – Limitation on Capital Losses
3
Internal Revenue Service. Topic No. 559, Net Investment Income Tax
4
Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax
5
Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities
6
Internal Revenue Service. Instructions for Form 1099-B (2026)
7
Internal Revenue Service. Topic No. 429, Traders in Securities
8
Office of the Law Revision Counsel. 26 USC 475 – Mark-to-Market Accounting for Dealers in Securities
9
Internal Revenue Service. Instructions for Form 4797 (2025)
10
Internal Revenue Service. Revenue Procedure 99-17
11
Office of the Law Revision Counsel. 26 USC 1256 – Section 1256 Contracts Marked to Market
12
Office of the Law Revision Counsel. 26 USC 1212 – Capital Loss Carrybacks and Carryovers
13
Internal Revenue Service. Form 1040-ES (2026)
14
Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty
15
Internal Revenue Service. About Form 1099-B, Proceeds From Broker and Barter Exchange Transactions
16
Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets
17
Internal Revenue Service. Instructions for Form 8949
18
Internal Revenue Service. Automated Records