🧾 Taxes for traders (US)

🎯 In 30 seconds: Profits on investments held one year or less are taxed like wages, at up to 37% federally. Held more than a year, they get lower long-term rates of 0%, 15% or 20%. For 2026, a single filer pays 0% on long-term gains while taxable income is $49,450 or less. Losses offset gains, and up to $3,000 of extra loss a year can offset other income. The wash sale rule blocks a loss if you buy the same stock back within 30 days. This chapter explains the rules; it is not personal tax advice.

Capital gains in plain words

When you sell a stock for more than you paid, the difference is a capital gain. Sell for less and it is a capital loss. What you paid, including commissions, is your cost basis.

Gain or loss = sale proceeds minus cost basis

You owe tax only when you sell (or when a position is otherwise "realized"). A stock that doubled and that you still hold is an unrealized gain with no tax yet.

The holding period decides the rate. Held more than one year: long-term. Held one year or less: short-term. Most trading gains are short-term.

2026 rates: short-term

Short-term gains are added to your other income and taxed at ordinary income rates. For tax year 2026, the IRS brackets for a single filer (Rev. Proc. 2025-32) are:

The 2026 standard deduction for a single filer is $16,100, so the first $16,100 of income is generally not taxed at all before these brackets start.

2026 rates: long-term

Long-term gains (and qualified dividends) get their own rates, based on your total taxable income. For 2026, from Rev. Proc. 2025-32:

On top of these, a separate 3.8% net investment income tax applies to investment income for people with modified adjusted gross income over $200,000 (single) or $250,000 (married filing jointly). Those thresholds are set in the law and are not adjusted for inflation. Your state may tax gains too.

Worked example (hypothetical, 2026, single filer). Your taxable income is $55,000 from your job, and you have a $5,000 gain, bringing taxable income to $60,000.

Young traders: if someone can claim you as a dependent, the "kiddie tax" can tax part of your investment income above a small threshold at your parents' rate. IRS Topic 553 explains who it applies to. Also, gains inside a Roth IRA are not taxed at all if rules are followed (Account types).

Losses and the $3,000 limit

Losses first offset gains. Short-term losses offset short-term gains first, long-term against long-term, then the rest net against each other. If you end the year with a net loss, you can deduct up to $3,000 of it against other income ($1,500 if married filing separately). Any loss beyond that carries forward to later years until it is used up.

The wash sale rule

You cannot sell a stock at a loss, claim the loss, and immediately buy it back. Under the wash sale rule in IRS Publication 550, a loss is disallowed if, within 30 days before or after the sale, you:

• buy substantially identical stock or securities,
• acquire them in a fully taxable trade,
• acquire a contract or option to buy substantially identical stock, or
• buy substantially identical stock in your IRA or Roth IRA.

It also counts if your spouse, or a corporation you control, buys it. The disallowed loss is not gone forever in most cases: it is added to the cost basis of the new shares, and the holding period of the old shares carries over. The big exception is the IRA case, where the loss does not get added to the basis.

Worked example (hypothetical). On March 1 you buy 100 shares at $40 ($4,000). On June 10 you sell them at $30 ($3,000), a $1,000 loss. On June 25 you buy 100 shares back at $31 ($3,100).

If you later sell the new shares at $35 ($3,500), your loss then is $600. Over the two trades you lost $600 in total ($4,000 paid, $3,000 received, $3,100 paid, $3,500 received), and $600 is the loss you end up reporting. The wash sale only delayed it.

Cost basis methods

If you bought the same stock at different times and sell only part, which shares did you sell? Publication 550 says that if you cannot identify the shares, the ones you bought first are treated as sold first (FIFO). If you tell your broker which specific lot to sell at the time of the sale and get written confirmation, you can use specific identification. Mutual fund shares can also use the average basis method.

Hypothetical: you bought 50 shares at $20 in January 2025 and 50 at $40 in January 2026. In November 2026 you sell 50 at $35.

Same trade, very different tax result. Most brokers let you set a default lot method in account settings.

The paperwork: 1099-B, Form 8949 and Schedule D

• Form 1099-B comes from your broker early in the year. It lists each sale, proceeds, cost basis (for most shares bought in recent years), whether it was short- or long-term, and any wash sale adjustment.
• Form 8949 is where each sale is reported on your return, with adjustments such as wash sales.
• Schedule D totals your gains and losses and carries the result to Form 1040.

Tax software can import 1099-B data from most brokers. A journal with every trade (Trading journal) helps you check it.

Trader tax status and the mark-to-market election

Most people who trade are investors for tax purposes, whatever they call themselves. IRS Topic 429 says you qualify as a trader only if you seek to profit from daily market movements rather than dividends or long-term appreciation, and your activity is substantial and carried on with continuity and regularity. There is no fixed number of trades in the guidance.

Traders can deduct trading business expenses on Schedule C. They can also make a Section 475(f) mark-to-market election. With it:

• positions are treated as sold at year-end market value,
• gains and losses become ordinary (reported on Form 4797), not capital,
• the wash sale rule and the $3,000 capital loss limit no longer apply.

The election is due by the original due date (without extensions) of the return for the year before the year it takes effect. Late elections are generally not allowed. It also gives up long-term capital gain rates on those positions. Talk to a tax professional before doing this.

Section 1256 contracts: the 60/40 rule

Section 1256 contracts include regulated futures contracts and broad-based index options (see Futures basics and Index options). They follow two special rules:

• Mark-to-market: any contract you hold at year-end is treated as sold at its fair market value on the last business day of the year.
• 60/40: 60% of the gain or loss is long-term and 40% is short-term, regardless of how long you held it.

In the worked example, a $5,000 gain on a Section 1256 contract would be $3,000 long-term at 15% ($450) plus $2,000 short-term at 22% ($440), so $890 instead of $1,100. These are reported on Form 6781. Options on individual stocks and ordinary stock ETFs are not Section 1256 contracts.

Try it

Take the trades from your paper portfolio or journal and sort them into short-term and long-term. Compute the net gain or loss for each. Using your own expected 2026 taxable income and the tables above, estimate the federal tax. Then check whether any loss sale had a repurchase within 30 days, and recompute with the wash sale adjustment.

Sources

• IRS: Rev. Proc. 2025-32, 2026 inflation adjustments (tax tables, capital gains thresholds, standard deduction)
• IRS: Topic no. 409, Capital gains and losses
• IRS: Publication 550, Investment income and expenses (wash sales, basis, Section 1256)
• IRS: Topic no. 429, Traders in securities
• IRS: Topic no. 559, Net investment income tax
• IRS: Topic no. 553, Tax on a child's investment income (kiddie tax)