Trader Tax Status (Section 475)
A designation for traders who qualify as conducting a trading business, which can allow a mark-to-market election under Section 475 and ordinary loss treatment. It has strict qualification requirements.
TTS is not a checkbox; it requires substantial, frequent, continuous trading that rises to the level of a business. For those who qualify, a 475 election can convert capital losses to ordinary and remove wash sale headaches, but the bar is high and worth a professional's review.
Trader Tax Status is not an election you simply claim; it is a factual determination that your trading rises to the level of a business. The IRS and courts weigh factors like the frequency and volume of your trades, the time you devote to trading, your intent to profit from short-term swings rather than long-term appreciation, and the continuity of the activity across the year. There is no bright-line number, which is what makes qualification a judgment call.
For those who do qualify, the benefits are different from the Section 1256 question. TTS lets you deduct trading-related business expenses, and a separate mark-to-market election under Section 475(f) can convert capital gains and losses to ordinary, removing the capital-loss limitation and sidestepping wash sale tracking. That can be valuable in a losing year, when ordinary losses are far more useful than capped capital losses.
The trade-offs are real. A 475 election generally must be made early and is difficult to revoke, and electing it forfeits the favorable 60/40 treatment that Section 1256 would offer on a winning year, because mark-to-market ordinary treatment and the 1256 blend are different paths. Whether TTS and a 475 election help you depends heavily on whether you tend to win or lose and on the rest of your tax picture, so it warrants a professional's review before you act.
A trader who places hundreds of Kalshi trades a week, spends hours a day at it, and trades nearly every market session may have a credible TTS case. Someone who places a few dozen trades a month around a day job generally does not, regardless of how serious they feel about it.
Frequently asked questions
How do I qualify for Trader Tax Status?
By trading frequently, substantially, and continuously enough that it resembles a business, judged on volume, time devoted, and intent to profit from short-term moves. There is no fixed trade count; it is a facts-and-circumstances test best reviewed with a professional.
What does a Section 475 election do?
It elects mark-to-market treatment, converting your trading gains and losses to ordinary. That lifts the capital-loss limitation and removes wash sale tracking, but it generally forfeits the Section 1256 60/40 benefit on profitable years.
Is TTS worth it for Kalshi traders?
It depends on your volume and whether you tend to win or lose. Ordinary loss treatment helps in down years; the 60/40 blend helps in up years. Because the election is hard to reverse, get a professional's read first.