- 1). Maintain your trader tax status. IRS rules state that to qualify as a trader you must seek to make profits from short-term market movements in the prices of securities and not from dividends, interest or capital appreciation; your activity must be substantial; and you must carry on this activity on a regular basis.
- 2). Notify the IRS you plan to use mark-to-market accounting, assuming you trade full time as a profession. Using mark-to-market accounting enables you to avoid having your profits taxed as ordinary income.
- 3). Keep a complete trading log of all stock trades made during the year. This log is also used to define your trades versus your investments, as all transactions not appearing in the log are considered to be longer-term investments (with a different tax basis). You must include a complete trading log when you file your taxes. All brokerages offer customers access to a database listing all past trades, and in most cases customers still receive a printed statement of all account activity at least yearly.
- 4). Use the correct tax forms when you file your taxes. Many traders incorrectly file their trading income taxes on Schedule D of Form 1040. Instead, use Form 4797 for stock trades or Form 6781 for futures or currency trades.