How Trading Profits Are Taxed in the US: Capital Gains, Wash Sales and the Forms You File

Short-term vs long-term: the holding period decides

This guide is general education about federal tax rules for US residents, not tax advice. Your result depends on your full situation, so check the IRS sources listed below and talk to a tax professional before making decisions.

When you sell a stock, an ETF or an option for more than you paid, the profit is a capital gain; if you sell for less, it's a capital loss. The IRS splits them into two groups based on how long you held the position:

• Short-term: held one year or less. Net short-term gains are taxed as ordinary income, at the same rates as your salary.
• Long-term: held more than one year. Taxed at lower rates: 0%, 15% or 20%.

The count starts the day after you buy and includes the day you sell. Example: if you bought shares on March 10, 2026, selling on March 10, 2027 is still short-term; selling on March 11, 2027 or later is long-term.

This is why the style you trade matters for taxes. Almost every gain from day trading and swing trading is short-term, taxed at your highest bracket. Gifts and inherited property have special holding period rules.

Federal capital gains rates for 2026

Which year applies in October 2026: returns for tax year 2025 were due April 15, 2026, or October 15, 2026 with an extension. Trades you close during 2026 fall under the 2026 figures below and go on the return you file in 2027.

Short-term gains use the ordinary income brackets, which for 2026 run from 10% to 37%. For example, a single filer pays 22% on taxable income from $50,400 to $105,700 and 24% from $105,700 to $201,775.

Long-term gains use their own thresholds. These are the figures the IRS published for tax year 2026 in Revenue Procedure 2025-32 (the return you file in 2027), based on taxable income, meaning income after deductions:

For the 2025 return you file in 2026, the thresholds are lower; IRS Topic 409 lists them (for example, the 0% rate for a single filer ends at $48,350).

The gain is stacked on top of your other income, so part of a large gain can fall in one rate and the rest in the next. Example: a single filer with $70,000 of taxable income makes a $5,000 profit. If the position was held 8 months, the gain lands in the 22% bracket: about $1,100 of federal tax. If it was held 13 months, it's taxed at 15%: about $750. That's before any state tax or the 3.8% surtax covered below. Some assets, such as collectibles, have a higher maximum long-term rate of 28%.

Losses: netting, the $3,000 limit and carryovers

Losses aren't wasted. At the end of the year, your losses first offset your gains. If you still have a net loss, you can deduct up to $3,000 of it against other income, such as wages ($1,500 if you're married filing separately). Whatever is left over is carried forward to later years, where it again offsets gains and up to $3,000 of other income.

Example: you closed the year with $4,000 in gains and $14,000 in losses, a net loss of $10,000. You deduct $3,000 this year and carry the other $7,000 forward. If next year you make $5,000 in gains, the carryover wipes them out and you can still deduct up to $2,000 more against other income, leaving nothing to carry.

The Schedule D instructions include a worksheet to figure your carryover, so keep last year's return handy. Every closed trade counts, which is one more reason to keep a clean trading journal.

The wash sale rule: the 30-day trap

A wash sale happens when you sell a stock or security at a loss and, within 30 days before or after the sale, you buy substantially identical securities, acquire a contract or option to buy them, or buy them in your IRA or Roth IRA. In practice that's a window of about 61 days around the sale.

If the rule applies, you can't deduct the loss that year. In general, the disallowed loss is added to the cost basis of the new shares, so it isn't lost forever: you recover it when you finally sell the replacement position without triggering the rule again. The big exception is your IRA or Roth IRA: if the replacement shares are bought there, the IRS says your basis is not increased, so the loss is effectively lost for good.

Example: you buy 100 shares at $50 and sell them at $45, a $500 loss. Twenty days later you buy 100 shares back at $46. The $500 loss is disallowed for now, and your basis in the new shares becomes $46 + $5 = $51 per share ($5,100).

Watch out if you trade the same ticker in and out: active traders can trigger dozens of wash sales without noticing. Your broker is required to report a wash sale in box 1g of Form 1099-B only when the sale and the repurchase happen in the same account and involve the same security (the same CUSIP number). A purchase in another account, such as a second broker or your IRA, is your responsibility to track.

Reporting and paying: Form 1099-B, Form 8949, Schedule D and estimated tax

1. Form 1099-B. Your broker sends it after year end. It shows the proceeds of each sale, the cost basis (for covered securities, such as stock bought after 2010), whether each gain is short-term or long-term, and any wash sale loss disallowed.
2. Form 8949. You list your sales here, separated into short-term (Part I) and long-term (Part II), along with any adjustments. A disallowed wash sale loss is an adjustment: you report it with code W even when your 1099-B already shows it in box 1g, and you enter the correct amount if the 1099-B figure is wrong. If your 1099-B shows the basis was reported to the IRS and you need no adjustments at all, you can usually skip Form 8949 and enter the totals directly on Schedule D.
3. Schedule D (Form 1040). It adds up your gains and losses, applies the $3,000 limit and carries the result to your Form 1040.

Futures and certain options: regulated futures contracts and other section 1256 contracts go on Form 6781. They're treated as sold at fair market value on the last business day of the year, and the net gain or loss is split 60% long-term and 40% short-term, regardless of how long you held them.

Estimated tax: trading profits have no withholding. If you expect to owe $1,000 or more for 2026 after withholding and refundable credits, you generally have to make quarterly payments with Form 1040-ES. The 2026 due dates are April 15, June 15 and September 15, 2026, and January 15, 2027. You generally avoid the underpayment penalty if your withholding and payments cover the smaller of 90% of your 2026 tax or 100% of your 2025 tax (110% if your 2025 adjusted gross income was over $150,000, or $75,000 if married filing separately).

Dividends, the 3.8% surtax and state taxes

Dividends. Your Form 1099-DIV separates them into two kinds:

• Qualified dividends are taxed at the same 0%, 15% or 20% rates as long-term gains. To qualify on common stock, you must hold the shares for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.
• Ordinary (nonqualified) dividends are taxed at your regular income rate. A dividend you collect after holding a stock for only a few days usually falls here.

Net Investment Income Tax (NIIT). On top of regular income tax, there's a 3.8% tax on net investment income, which includes capital gains, dividends, interest and income from trading in financial instruments. It applies to the smaller of your net investment income or the amount by which your modified adjusted gross income exceeds $200,000 (single or head of household), $250,000 (married filing jointly) or $125,000 (married filing separately). These thresholds aren't indexed for inflation. Example: a single filer with $230,000 of modified adjusted gross income, $50,000 of it from investments, pays 3.8% on $30,000: $1,140. It's figured on Form 8960.

State taxes. Most states tax capital gains as ordinary income at their own rates, with no special long-term rate. A few states, such as Texas and Florida, have no individual income tax, and some states have their own special rules. Check your state's tax agency, because this can add several percentage points to your bill.

Trader tax status and the section 475(f) election

For tax purposes, most people who trade are investors, even if they trade often. The IRS treats you as a trader in securities only if you seek profit from daily price movements (not dividends or long-term appreciation) and your activity is substantial and carried on with continuity and regularity. It looks at holding periods, how often and how much you trade, whether you do it for a livelihood and how much time you spend on it. Calling yourself a day trader doesn't make you one.

If you qualify:

• You report trading expenses (data, software, equipment) as business expenses on Schedule C. Commissions are not deducted separately; they adjust your gain or loss.
• Your trading gains are still not subject to self-employment tax.
• Without an election, your trades are still capital gains and losses, and the $3,000 limit and the wash sale rule still apply.

The section 475(f) mark-to-market election. A qualifying trader can elect mark-to-market accounting. Gains and losses become ordinary (reported on Form 4797), securities you still hold at year end are treated as sold at fair market value on the last business day of the year, and the wash sale rule and the $3,000 limit no longer apply to those securities. The trade-off: ordinary gains don't get long-term rates.

Caution: the election is generally due by the original due date of the prior year's return, without extensions. To use it for 2027, you'd normally have to make it by the due date of your 2026 return. Late elections are generally not allowed, and revoking the election also requires a statement filed by a similar deadline, plus Form 3115. Trader status is judged on facts and is often questioned, so don't make this election without a tax professional who works with active traders.