Tax planning for traders at year-end 2024 should be similar to 2023, as tax law is mostly the same in 2024. However, it will be different for 2025 year-end planning.
Most tax provisions for individuals in the 2017 Tax Cuts and Jobs Act (TCJA) expire on Dec. 31, 2025. TCJA temporarily reduced income tax rates, roughly doubled the standard deduction, restricted itemized deductions, introduced a state and local tax (SALT) cap and the 20% qualified business income (QBI) deduction on pass-through entities, revised NOL rules, but permanently reduced the corporate tax rate to 21%. Oddly, the corporate tax relief is permanent, and the individual provisions are temporary, which was done to meet budget reconciliation requirements.
The 2025 president and Congress will discuss significant tax changes during 2025, so year-end tax planning in 2025 may differ substantially from 2024. The election results of Nov. 5, 2024, will give telltale signs of tax changes coming in 2026.
Recent tax acts, including the TCJA, 2020 CARES, 2019 and 2022 SECURE, and 2022 IRA, didn’t alter trader tax law, including trader tax status (TTS), Section 475 MTM accounting, wash-sale losses on securities, or the tax treatment on financial products, including futures (Section 1256 contracts) and cryptocurrencies (intangible property). Neither presidential candidate proposed changes to TTS-related benefits.
For year-end planning, it’s helpful to consider the IRS’s annual inflation adjustments in income and capital gains tax brackets, income thresholds, retirement plan contribution limits, standard deductions, etc. See “IRS provides tax inflation adjustments for tax year 2024” and “IRS releases tax inflation adjustments for tax year 2025.” The inflation-adjusted amounts increase by approximately 2.8% from 2024 to 2025, after a rise of 7.1% from 2023 to 2024.
Trader tax status (TTS) constitutes business expense treatment and unlocks meaningful tax benefits for active traders who qualify. The first step is to determine eligibility. If you qualify for TTS, you can claim some tax breaks, such as business expense treatment, after the fact. TTS traders can also elect and set up other tax breaks—like Section 475 MTM, employee benefit plans (health and retirement), and a SALT cap workaround—on a timely basis. See my golden rules for TTS qualification.
DEFER INCOME AND ACCELERATE TAX DEDUCTIONS
If you are in a reasonably high tax bracket for 2024, consider deferring income and accelerating tax deductions to take advantage of a one-year deferral of tax payments.
Income deferral could be suitable for a trader who expects a lower income next year due to retirement, a job change, or other circumstances. For example, a trader may leave employment to pursue full-time trading in 2025. Consider deferring bonuses at work, respecting the constructive receipt of income rule, which means you cannot turn your back on an income payment.
Income deferral reduces AGI and might unlock other tax breaks based on AGI thresholds. Including the 3.8% net investment income tax, qualified business income deduction, non-deductible Roth IRA contributions, deductible traditional IRA contributions, child tax credits, education tax credits, electric vehicle (EV) tax credits, and student loan interest deductions.
Traders eligible for TTS in 2024 should consider accelerating trading business expenses before year-end, such as purchasing computer equipment using tangible property expense and first-year (immediate) expense using Section 179 depreciation.
Consider delaying profitable investments’ realization (sales) to defer capital gains taxes. It also might avoid the Affordable Care Act’s (ACA) 3.8% net investment income tax (NIIT) over the MAGI threshold of $200,000 for single filers, $250,000 for married filing jointly, and $125,000 for married filing separately. The IRS does not make annual inflation adjustments for these ACA NIIT thresholds.
Tax loss harvesting: Consider accelerating the sale of losing investments to reduce capital gains or to use the $3,000 capital loss limitation against ordinary income. Net capital losses over this $3,000 allowance may be carried over to subsequent tax years to offset capital gains but not Section 475 ordinary income trading gains. Trading capital gains and losses are combined on Schedule D with investment capital gains and losses.
AVOID YEAR-END WASH SALE LOSSES
Avoid triggering year-end wash sale (WS) losses on securities, which can defer capital losses to subsequent tax years and raise current-year tax liability.
Day and swing traders inevitably trigger many WS loss adjustments amounting to tens or hundreds of thousands of dollars. A WS occurs when you take a loss on a security and repurchase it within 30 days (after or before). For example, sell 100 shares of XXX equity on Dec. 15, 2024, for a $10,000 capital loss and repurchase that same equity position on January 5, 2025. That’s a WS; the $10,000 loss is deferred at year-end 2024 and added to the repurchased position’s cost basis.
WS during the year can be okay if a trader avoids WS loss deferral at year-end. For example, assume a trader has many WS losses on the stock symbol AAPL during the year. If they sell their entire AAPL position by year-end and wait 31 days in Jan. 2025 to repurchase AAPL equity or the equity options on AAPL, there will be no open WS loss deferral on AAPL at year-end 2024.
It can be different with investment positions. Suppose an investor sells an unprofitable AAPL investment position in early Oct. 2024 and triggers a WS when repurchasing AAPL within 30 days in late Oct. 2024 as an investment position. They might want to retain that now profitable AAPL investment position at year-end 2024, which has embedded the WS loss as an additional cost basis. That counts as WS loss deferral, too.
IRS rules require taxpayers to report WS loss adjustments on securities based on substantially identical positions across all accounts, including IRAs. Substantially identical means equity, an option on that equity (equity option), and those options at different exercise dates.
Suppose a trader sells AAPL for a taxable account loss and repurchases that position in their IRA within 30 days. In that case, it triggers a permanent WS loss in the taxable account, as there is no way to add the WS loss to the cost basis in an IRA account. An IRA account does not trigger WS losses on its account.
The IRS has different WS reporting rules for brokers on Form 1099-B versus those for taxpayers. That has caused significant confusion among taxpayers and tax preparers. Brokers report WS losses on 1099-Bs on identical positions per taxable account. AAPL is identical to AAPL stock only but substantially identical to AAPL options. It would be unreasonable to ask Schwab to combine WS loss reporting with Interactive Brokers. Brokers won’t even calculate WS losses across multiple accounts with the same broker.
This is why active securities traders should use a trade accounting program to identify potential WS loss problems across all their accounts, especially going into year-end, so they have time to avoid year-end deferral of capital losses.
WS losses might be preferable to capital loss carryovers at year-end 2024 for TTS traders. A Section 475 election in 2025 converts year-end 2024 WS losses on TTS positions (not investment positions) into ordinary losses in 2025. That’s better than a capital loss carryover into 2025, which might give you pause when making a 2025 Section 475 election (due April 15, 2025). You want a clean slate with no remaining capital losses before electing Section 475 ordinary income and loss.
There are other ways to avoid WS losses:
- TTS traders can elect Section 475 MTM by April 15 of the current tax year, and 475 trades are not subject to WS losses. It’s too late to elect 475 for 2024.
- Absorb a WS loss with a subsequent gain on a substantially identical position.
- Trade futures (Section 1256 contracts) in Jan. 2025, which breaks the chain on the securities traded with capital losses in Dec. 2024.
- Trade different ETFs in Jan 2025 than in Dec 2024. For example, numerous ETFs track the S&P 500, which are not substantially identical.
TAX EFFICIENT SALES & ACCOUNTING METHOD
If you want to sell some of your portfolios, consider taking long-term capital gains, which are subject to lower tax rates (0%, 15%, and 20%), rather than short-term capital gains, which are taxed at ordinary rates as high as 37%.
That might require using the “specific identification accounting method” vs. first-in-first-out. (See FIFO vs. Specific Identification Accounting Methods.)
0% long-term capital gains rate: If you have a low income, consider realizing long-term capital gains at the 0% rate by selling open positions for over 12 months. The (long-term) capital gains tax rates are 0%, 15%, and 20%.
The 2024 zero capital gains rate applies to singles with taxable income under $47,025, married couples filing jointly under $94,050, and heads of household under $63,000.
Caution: If you go $1 over the zero-rate bracket, all long-term gains are subject to the 15% capital gains rate. This rate doesn’t work like progressive marginal ordinary tax brackets.
STRADDLES AND CONSTRUCTIVE SALE RULES
The IRS has rules to prevent income deferral and loss acceleration in offsetting positions that lack sufficient economic risk. These rules include straddles, the constructive sale rule, and shorting against the box.
Selling the losing legs on a complex options trade with offsetting positions can trigger the straddle loss deferral rules.
In the old days, owners stored stock certificates in safe deposit boxes. They could borrow and sell securities, but not those stored in their box — hence the moniker, “short sale against the box.” It became a popular tax shelter to defer capital gains taxes.
The Taxpayer Relief Act of 1997 mostly closed the deferral loophole by adding Section 1259, Constructive Sales Treatment for Appreciated Financial Positions. Before these changes, a trader could own security A with a significant unrealized capital gain and short it against the box before year-end to freeze the capital gain economically but defer its realization until the following year.
Exception: A trader can still achieve tax deferral on an open short against the box position at year-end if they buy to cover the open short position by Jan. 30 and leave the long position available throughout the 60 days beginning on the date they close the transaction. So there is an economic risk. Please see an example from Pub. 550 Investment Income and Expenses, Short Sales.
The constructive sale rules apply to substantially identical properties, which include equities, equity options (including put options), futures, and other contracts. For example, Apple’s equity is substantially identical to Apple’s call-and-put equity options. Traders use various financial products and may inadvertently trigger Section 1259 constructive sales. Report gains on constructive sales, not losses.
Brokers only report constructive sales on appreciated positions on Form 1099-Bs if you request it quickly. Otherwise, traders need to make manual adjustments on Form 8949.
ACQUIRE INCOME AND DEFER CERTAIN EXPENSES
A TTS trader with significant Section 475 ordinary losses should consider accelerating income. Try to advance enough income to use the standard deduction and take advantage of lower marginal tax brackets. Stay below the threshold for unlocking various AGI-dependent deductions and credits.
A new trader in 2024 may have a low trading income after leaving a high-paying job at the end of 2023. They expect to be in a higher tax bracket in 2025, so they accelerate their income to 2024 to take advantage of lower tax brackets.
EXCESS BUSINESS LOSSES AND NET OPERATING LOSSES
TTS traders with a Section 475 election might incur ordinary business losses for 2024. Before the TCJA commenced in 2018, a TTS/475 trader could carry back a net operating loss (NOL) for two years, generating an immediate tax refund. TCJA repealed NOL carrybacks (except for farmers) and limited NOL carryforwards to 80% of the subsequent year’s taxable income.
The TCJA introduced an excess business loss (EBL) limitation. Excess losses over the limit are carried forward as NOLs. The EBL threshold is $610,000 for joint filers in 2024 ($626,000 in 2025) and $305,000 ($313,000 in 2025) for all other filers.
The 2020 pandemic-relief CARES Act suspended the TCJA’s EBL and NOL changes for 2018, 2019, and 2020 and allowed five-year NOL carrybacks (e.g., a 2020 NOL carryback to 2015). The TCJA’s EBL and NOL carryforward rules apply for tax years 2021 through 2028. Interim tax legislation extended the expiration date by three years for EBL and NOL changes only.
ROTH IRA CONVERSION
Evaluate changing a traditional IRA or 401(k) into a Roth IRA. Distributions from a standard retirement plan are taxed as ordinary income (not capital gains), whereas with a Roth IRA, distributions in retirement years are tax-free.
On the conversion date, the market value of the traditional retirement account is taxed at ordinary rates. Subsequent growth in the Roth IRA account is tax-free. If your retirement portfolio is depressed, you might enjoy recovery of values inside a Roth IRA.
The TCJA repealed the recharacterization option, so you can no longer reverse the conversion if the plan assets decline. Since major stock indexes are currently at record highs, conversion may not be wise.
Generally, there’s a 10% excise tax on early withdrawals from retirement plans before age 59½. With a Roth IRA conversion, you can avoid excise tax by paying conversion taxes outside the Roth plan. Roth IRA conversions have no income limit, unlike regular Roth IRA contributions.
NET INVESTMENT INCOME TAX
Investment fees and expenses are not deductible when calculating net investment income (NII) for the Affordable Care Act’s (ACA) 3.8% net investment tax (NIT). NIT only applies to individuals with NII and modified adjusted gross income (AGI) exceeding $200,000 single, $250,000 married filing jointly, or $125,000 married filing separately. The IRS does not index these ACA thresholds for inflation. NII includes portfolio income, capital gains, and Section 475 ordinary income.
BUSINESS EXPENSES AND ITEMIZED VS. STANDARD DEDUCTION
Business expenses: TTS traders are entitled to business and home office deductions from gross income. The home office deduction requires income, except for the mortgage interest and real property tax portion.
TTS traders can deduct tangible personal property like a computer, up to $2,500 per item, providing the taxpayer files a Sec. 1.263(a)-1(f) safe harbor election with the tax return. They can also use Section 179 first-year expense, bonus, or regular depreciation on computers, equipment, furniture, and fixtures (over $2,500 per item). Traders with TTS in 2024 may consider going on a shopping spree before Jan. 1, 2025. There is no sense in deferring TTS expenses because you cannot be sure you will qualify for TTS in 2025.
Employee business expenses: Ask your employer if they have an accountable plan for reimbursing employee business expenses. You must “use it or lose it” before year-end. TCJA suspended unreimbursed employee business expenses and miscellaneous itemized deductions through tax year 2025. TTS S-Corps should use an accountable plan to reimburse employee business expenses since the trader/owner is its employee.
Unreimbursed partnership expenses: Partners in LLCs taxed as partnerships can deduct unreimbursed partnership expenses (UPE). That is how they usually deduct home office expenses. UPE is more convenient than an S-Corp accountable plan because the partner can arrange the UPE after year-end. The IRS doesn’t want S-Corps to use UPE.
SALT cap: TCJA capped itemized deductions for state and local income, sales, and property taxes (SALT) at $10,000 per year ($5,000 for married filing separately) and did not index it for inflation. About 36 states enacted SALT cap workaround laws. Search “(Your state) SALT cap workaround” to learn the details.
Most states follow a blueprint approved by the IRS. Generally, elect to make pass-through entity (PTE) payments on a partnership or S-Corp tax return filed by your business. It doesn’t work with a sole proprietorship filing a Schedule C. PTE is a business expense deduction shown on the state Schedule K-1. Most states credit the individual’s state income tax liability with the PTE amount or most of it. Essentially, you convert a non-deductible SALT itemized deduction (over the cap) into a business expense deduction from gross income. Act well before year-end; otherwise, you might delay the benefit to next year.
TCJA’s SALT cap expires at the end of 2025. California stated it would end its SALT cap workaround if Congress let the SALT cap expire. Look into how your state would handle it.
Investment fees and expenses: The TCJA suspended all miscellaneous itemized deductions subject to the 2% floor, including investment fees and costs. An example is fees paid to an RIA for managing investments. Brokerage commissions are not investment fees; commissions are included in capital gains, deducted from proceeds, and added to the cost basis.
TCJA did not suspend an itemized deduction for investment-interest expenses limited to investment income, with the excess as a carryover.
Standard deduction: The TCJA roughly doubled the 2018 standard deduction and suspended and curtailed several itemized deductions. For 2024, with an inflation adjustment, the IRS increased the standard deduction to $29,200 for married couples filing jointly, $14,600 for single/married couples filing separately, and $21,900 for heads of household. There is an additional $1,550 for married seniors and $1,950 for unmarried seniors.
Many taxpayers use the standard deduction. For convenience, some taxpayers may feel inclined to stop tracking itemized deductions because they figure they will use the standard deduction. Don’t overlook the impact of itemized deductions on state tax filings, where you might get some tax relief.
CHARITABLE CONTRIBUTIONS
In 2024, there will be no non-itemized above-the-line deduction for charitable contributions, as there was temporarily in recent years. Individuals who want to deduct charitable contributions must use itemized deductions.
Individuals may itemize contributions to charitable organizations up to a percentage of AGI. Through 2025, the rate is 60% for cash contributions and 30% for noncash donations.
You may also donate appreciated securities to charity. This will give you a charitable deduction at the fair market value and avoid capital gains taxes. (Billionaires use this strategy, and you can use it.)
Consider a charitable remainder trust to group philanthropic contributions for itemizing deductions and taking a standard deduction in off-years. A donor-advised fund provides similar flexibility.
Qualified charitable distributions (QCDs) allow individuals aged 70 1/2 or older to donate directly from their traditional IRA to eligible charities. The QCD distribution is excluded from taxable income, and there is no charitable deduction. The 2024 maximum QCD limit is $105,000 per person.
HEALTH SAVINGS ACCOUNT
A trader can take an AGI deduction for a contribution to a health savings account (HSA) without qualifying for TTS, having a source of earned income, or self-employment income.
A high-deductible health plan (HDHP) is required for an HSA contribution. The annual contribution to an HSA for 2024 is limited to $4,150 for an individual HDHP and $8,300 for a family HDHP. Individuals aged 55 or older can make a catch-up contribution of $1,000.
ESTIMATED INCOME TAXES
Taxpayers should pay federal and state estimated taxes owed by Jan. 15, 2025, and the balance by April 15, 2025. Those who have reached the SALT cap don’t need to prepay 2024 state-estimated income taxes by Dec. 31, 2024 (a strategy before TCJA).
Many traders skip making quarterly estimated tax payments on capital gains or 475 income during the year, figuring they might incur trading losses later in the year. They can catch up with the Q4 estimate due by Jan. 15, 2025, but might still owe an underpayment penalty for Q1 through Q3 quarters. Some rely on the safe harbor exception to cover their prior year’s taxes. (See Traders Should Focus On Q4 Estimated Taxes Due January 16.)
The underestimated tax penalty is higher in 2024 than in prior years, at approximately 8%.
ADJUST WITHHOLDING
Employees should consider withholding additional taxes on year-end paychecks. This helps avoid underpayment penalties, as the IRS treats wage withholding as being made throughout the year. This loophole applies to officers and owners of TTS S-Corps.
20% DEDUCTION ON QUALIFIED BUSINESS INCOME
In 2018, TCJA introduced a new tax deduction for pass-through businesses, including sole proprietors, partnerships, and S-Corps. Subject to haircuts and limitations, a pass-through business could be eligible for a 20% deduction on qualified business income (QBI).
Because TTS traders are considered a “specified service trade or business” (SSTB), taxable income above the following threshold is not deductible: $383,900/$191,950 (married/other taxpayers) for 2024.
There is also a phase-out range above the threshold of $100,000/$50,000 (married/other taxpayers). Within this range, the W-2 wage and property basis limitations apply. TTS traders with an S-Corp usually have wages, whereas sole proprietor traders do not.
QBI for traders includes Section 475 ordinary income and loss and trading business expenses. QBI excludes capital gains and losses, Section 988 forex income or loss, dividends, and interest income.
Try to manage your AGI to stay within the QBI threshold.
S-CORP OFFICER COMPENSATION
TTS traders use an S-Corp to arrange health insurance and retirement plan deductions. These deductions require earned income or self-employment income. A TTS S-corp salary is earned income, unlike unearned income trading gains.
S-Corps pay officer compensation in conjunction with employee benefit deductions through payroll tax compliance done before year-end 2024. Otherwise, traders miss the boat.
TTS is necessary since an S-Corp investment company cannot have tax-deductible wages, health insurance, or retirement plan contributions. A trading S-Corp is not required to have “reasonable compensation,” so a TTS trader may determine officer compensation based on how much to reimburse for health insurance and how much they want to contribute to a retirement plan. Sole proprietors and partnership TTS traders cannot pay salaries to 2% or more owners; hence, they need an S-Corp.
S-Corp wages impact the SALT cap workaround, as it hinges on net income after wages. If you fall into the QBI phase-out range, wages are required to increase the QBI deduction. This decision-making has many moving levers and parts, so consult your CPA for year-end tax planning early in December. Payroll planning and execution take some time, so act well before the year-end.
S-COP HEALTH INSURANCE
S-Corps may deduct health insurance for only the months it was operational and qualified for TTS. Employer-provided health insurance, including Cobra, is not deductible.
The S-corp reimburses the employee/owner through the accountable reimbursement plan before year-end. The company adds the health insurance reimbursement to taxable wages but does not withhold Social Security or Medicare taxes from that portion of W-2 compensation. The officer/owner takes an AGI deduction for health insurance on their tax return. It’s quirky.
S-CORP RETIREMENT PLAN CONTRIBUTION
TTS S-Corps can unlock a retirement plan deduction by paying sufficient officer compensation in Dec. 2024 when results for the year are evident. Net income after deducting wages and retirement contributions should be positive. Creating a salary that generates losses is inappropriate.
Establishing a Solo 401(k) retirement plan with a financial intermediary is necessary before the year-end. The plan includes the 100%-deductible elective deferral up to a 2024 maximum of $23,000 (or $30,500 if aged 50 or older with the $7,500 catch-up provision) on the Dec. 2024 paycheck and annual W-2. You have one month to pay the elective deferral into the Solo 401(k) plan in Jan. 2025.
You can pay the 25%-deductible profit-sharing plan (PSP) portion of the S-Corp Solo 401(k) up to a maximum of $46,000 by the 2024 S-Corp tax return due date, including an extension, which means Sept. 15, 2025. For 2024, the maximum PSP contribution requires wages of $184,000 ($46,000 divided by a 25% defined contribution rate).
Tax planning calculations will show the various projected outcomes of income tax savings vs. payroll tax costs. Paying into social security builds retirement benefits, as the Social Security Administration (SSA) looks back at your highest 35 years of earnings (salaries) when calculating your retirement benefit.
Consider a Solo 401(k) Roth for the elective-deferral portion only. The contribution is not deductible, but the contribution and growth within the Roth are permanently tax-free. Traditional plans have a tax deduction upfront, and all distributions are subject to ordinary income taxes in retirement.
Traditional retirement plans have required minimum distributions (RMD) by age 72 (73 if you reach age 72 after Dec. 31, 2022), whereas Roth plans don’t have RMD.
Distributions from traditional retirement plans generate ordinary income, so manage that lever well to achieve AGI thresholds.
HAVE YOUR NEW ENTITY READY ON JAN. 1, 2025
If you missed employee benefits (health insurance and retirement contributions) in 2024, consider an LLC with an S-Corp election for the tax year 2025. Or you may want a spousal-member LLC taxed as a partnership for 2025 to maximize the SALT cap workaround and segregate trading from investing.
Consider the following plan to be ready to trade on the first trading day of Jan. 2025. Form a single-member LLC in mid-Dec. 2024, obtain the employee identification number (EIN), and open the LLC brokerage account before year-end to be ready to trade as of Jan. 1, 2025.
The single-member LLC is a “disregarded entity” for the tax year 2024, which avoids an entity tax return filing for the 2024 initial short year. You can add your spouse as an LLC member on Jan. 1, 2025, creating a partnership tax return for 2025.
Alternatively, if you want health insurance and retirement plan deductions for 2025, your single-member or spousal-member LLC should submit a 2025 S-Corp election within 75 days of Jan. 1, 2025.
The partnership or S-Corp is deemed a “new taxpayer” in 2025, so it can make an internal resolution within 75 days of Jan. 1, 2025, to elect Section 475 MTM on securities for 2025. Otherwise, an existing partnership or S-Corp must file an external 475 election statement with the IRS by March 15, 2025.
TAX RELIEF: PRESIDENTIALLY DECLARED DISASTER AREAS
In 2024, several disasters, including hurricanes, flooding, tornadoes, wildfires, and railcar accidents, occurred. Check the IRS.gov website for Tax Relief in disaster situations. Click the button to get information about your state.
GIFTS AND ESTATE TAXES
The annual gift tax exclusion is $18,000 for 2024 and $19,000 for 2025.
The unified estate and gift tax exemption for those who die in 2024 is $13,610,000; for those who die in 2025, it’s $13,990,000; and for married couples in 2024, it’s $27,220,000.
The estate tax exemption was significantly increased under the TCJA but will expire at the end of 2025. It’s nearly double the pre-TCJA exemption levels. The increased exemption is scheduled to expire on Dec. 31, 2025. If Congress does not extend the current exemption, the estate tax exemption will revert to pre-TCJA levels in 2026, adjusted for inflation. Estimates suggest the exemption may drop to approximately $7.5 million per individual and $14.5 million for married couples in 2026. Check your state for estate tax rules, too.
Tax laws and regulations can change, so it is prudent to consult a tax professional for the most up-to-date information and personalized advice on year-end tax strategies for traders.
Star Johnson, CPA, contributed to this blog post.
Read the full article here
