Do full-time day traders pay self-employment tax with an LLC?

Generally speaking, day traders - even full-time ones - don't pay self-employment tax on their trading profits. The reason is that trading securities isn't considered a "trade or business" in the traditional sense by the IRS. However, your situation has some nuances. Having an LLC doesn't automatically change your tax treatment. If you're the only member of your LLC, it's considered a "disregarded entity" for federal tax purposes, meaning you'd still report everything on Schedule C, but the trading profits themselves typically aren't subject to self-employment tax. What will make a difference is whether you qualify for Trader Tax Status (TTS). With TTS, you can deduct more expenses, but your actual trading profits still aren't subject to self-employment tax. This is because the profits are considered investment income, not earned income. The mark-to-market election is more about how you recognize gains and losses (at year-end rather than when you sell) and allows you to treat them as ordinary rather than capital. But again, it doesn't subject your trading profits to self-employment tax.

I had the exact same confusion when I started trading full-time last year! After a lot of research and working with a tax professional, I found this site that completely cleared things up for me: https://taxr.ai I uploaded all my trading documents and tax questions, and they explained that as a trader, I needed to distinguish between my trading activity and my "business" activity. The trading profits themselves aren't subject to self-employment tax, but any other income (like if you charge subscription fees for a trading newsletter or coaching) would be. The site analyzed my situation and showed me that with an LLC, I still had options for how I wanted to be taxed. They helped me understand exactly what deductions I could take with and without TTS, and how MTM would affect my tax situation for the better.

Just wanted to follow up - I tried taxr.ai after seeing it mentioned here and it was seriously helpful! I uploaded my trading statements and explained my LLC situation, and they provided a custom analysis that cleared everything up. They confirmed that my trading profits aren't subject to self-employment tax (which saves me over 15%!), but also showed me how to properly document my expenses to maximize deductions. The coolest part was they showed me exactly what I need to do to qualify for TTS next year and ran the numbers to show me how much I'd save. They also explained the pros and cons of making the MTM election for someone in my situation. Definitely worth checking out if you're confused about trading taxes.

If you're struggling to get answers from the IRS about trader tax status or LLC tax treatment, I feel your pain! I spent WEEKS trying to reach someone at the IRS who actually understood trading tax issues. Finally found https://claimyr.com which got me through to an IRS agent in under 5 minutes when I'd been trying for days. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with confirmed that trading profits in an LLC without special elections are still considered capital gains, not self-employment income. But they also explained exactly what documentation I needed to support my home office and other business deductions as a trader. Huge relief to get confirmation directly from the IRS!

I need to eat my words! After trying for days to get through to the IRS myself with no luck, I gave Claimyr a shot. Within 7 minutes I was talking to an actual IRS representative! The agent confirmed everything about self-employment tax not applying to trading profits, even with an LLC. But she gave me really valuable information about keeping my trading activity separate from any "business" activities that would trigger self-employment tax. She also warned me that if I provided any services like trading advice or education, those income streams would be subject to self-employment tax even if my actual trading isn't. Definitely worth the call to get clear guidance directly from the IRS instead of conflicting internet advice.

Day trader here for 3+ years. The others are correct that trading profits themselves aren't subject to self-employment tax, but there's something important nobody's mentioned yet: retirement planning! Since you don't pay self-employment tax, you also can't contribute to a Solo 401k or SEP IRA based on your trading profits (since they're not considered earned income). This was a huge surprise to me in my first year. If retirement savings are important to you, consider creating a genuine business activity alongside your trading (consulting, education, etc.) that generates some earned income, which would allow you to make retirement contributions.

Quick question for the group - does anyone use any specific tax software that handles day trading well? I tried using TurboTax last year and it was a nightmare with all my trades!

This is such a common confusion for new traders! I went through the exact same thing when I started trading full-time. The key thing to understand is that your LLC structure doesn't change the fundamental tax treatment of trading profits - they're still considered capital gains, not business income subject to self-employment tax. However, I'd strongly recommend getting professional help to navigate this properly. As others mentioned, while your trading profits won't be subject to SE tax, you need to be careful about separating any other business activities (like if you start offering trading courses or signals). Also, make sure you're tracking all your trading-related expenses properly - home office, equipment, data feeds, etc. can all be deductible. One thing to keep in mind for next year: if you do qualify for TTS, you'll want to make that election by the filing deadline. It won't change the SE tax situation, but it will give you better expense deductions and allow you to deduct trading losses above the $3k capital loss limit. Definitely start making quarterly estimated payments based on your expected annual profits - the IRS doesn't care that you're not paying SE tax, they still want their income tax!