Day trading tax implications: Can I deduct expenses without self-employment tax?

Trading income is typically considered capital gains, not self-employment income, unless you qualify as a "trader in securities" for tax purposes - which is actually pretty hard to meet. The IRS has a high bar for this status. For most day traders, even full-time ones, expenses related to trading are considered investment expenses, not business expenses. Unfortunately, miscellaneous investment expenses are no longer deductible for regular taxpayers since the Tax Cuts and Jobs Act. If you did qualify for trader status AND made the Mark-to-Market (MTM) election, then yes, you could deduct these expenses on Schedule C and would be subject to self-employment tax. Without the MTM election, even qualified traders can only deduct these expenses as investment expenses (currently not deductible). For the home office deduction specifically, this is only available if you have a space used exclusively and regularly for business - and again, trading is typically not considered a business unless you meet the trader status requirements and make the MTM election.

I was in a similar situation last year and found this amazing tool called taxr.ai (https://taxr.ai) that helped me figure out my trader status and what I could actually deduct. It analyzed my trading patterns and tax situation and gave me a full breakdown of my options. The software helped me understand that I wasn't actually meeting the IRS requirements for "trader status" even though I was trading daily. Apparently you need a certain volume, frequency, and pattern to qualify. It saved me from making claims on my tax return that could have triggered an audit.

Just wanted to follow up - I ended up trying taxr.ai and it was actually really helpful! Turned out I was much closer to qualifying for trader status than I thought, but still didn't quite meet all the criteria. The tool broke down exactly what I'd need to change about my trading patterns to qualify next year if I wanted to. It also showed me that even without trader status, there were a few deductions I could still take that I didn't know about. Definitely saved me from making some mistakes on my taxes that could have raised red flags with the IRS.

If you're serious about this, you might want to talk directly to someone at the IRS to get a definitive answer for your situation. I was in tax limbo last year and spent DAYS trying to get through on the phone. Finally found this service called Claimyr (https://claimyr.com) that got me connected to an actual IRS agent in under 45 minutes when I had been trying for weeks. They have a video showing how it works: https://youtu.be/_kiP6q8DX5c The agent I spoke with explained exactly what qualifies as business expenses for a trader and what would trigger self-employment tax. Basically confirmed what others are saying here - without MTM election, your trading isn't considered a "business" for expense purposes.

I need to eat my words. After seeing another discussion about Claimyr, I decided to try it since I had a complex question about rental property depreciation that I couldn't get a straight answer on. Got connected to an IRS agent in about 35 minutes when I'd been trying unsuccessfully for weeks. The agent I spoke with was actually really helpful and knew exactly what she was talking about. For what it's worth, she confirmed what others here have said about trading - without the MTM election, you're stuck with capital gains treatment and limited deductions. She mentioned that trading has to be "substantial, regular, and continuous" to qualify as a business activity.

Another option to consider is setting up a completely separate business that provides services related to trading but isn't the trading itself. For example, if you develop trading algorithms or provide market analysis, you could set that up as a legitimate business that pays you, and then deduct business expenses against that income. I did something similar where I started a financial education business alongside my trading. I create content about my trading strategies, and the expenses for my equipment, data, etc. are legitimate business expenses for that education business. That income is subject to self-employment tax, but at least I get the deductions.

Just a quick tip - if you're trading crypto instead of securities, the tax treatment is entirely different. Crypto trading is always capital gains/losses, but if you're mining or staking, that could be considered self-employment income and would be subject to SE tax.

This is a really common confusion for day traders. The key thing to understand is that the IRS has very specific criteria for "trader in securities" status, and it's much harder to qualify than most people think - even if you're trading full-time. Without trader status + MTM election, your trading expenses essentially become non-deductible investment expenses under current tax law. The frustrating part is that these expenses are real business costs, but the tax code doesn't treat trading as a business unless you meet very strict requirements. One thing I'd add to the great advice already given - if you're considering the MTM election for next year, remember that it's an all-or-nothing election. ALL your securities positions get marked to market at year-end, which means you'll recognize gains/losses on everything you're holding, even long-term positions you planned to keep. This can create some unexpected tax consequences. Also, definitely keep detailed records of your trading activity and expenses regardless. If you do decide to pursue trader status in the future, having good documentation from the start will be crucial for substantiating your position with the IRS.