Trading Taxes and Capital Gains: The Basics

Trading Taxes and Capital Gains

An overview of how trading profits are taxed: short and long term capital gains, futures 60/40 treatment, crypto, losses, trader tax status and UK basics.

Beginner4 min readUpdated 3 Oct 2026

Lesson 41 of 44

Taxes can take a large share of trading profits, and the rules vary by country, product and holding period. This lesson gives a general overview, focusing mainly on the United States with a short section on the UK. It is educational, not tax advice: rules change and personal circumstances differ, so consult a qualified tax professional before making decisions. Still, understanding the basics helps traders keep proper records, avoid surprises and see how holding periods and products affect after tax returns.

US capital gains basics#

Type	Holding period	Tax treatment
Short term capital gains	One year or less	Taxed at ordinary income rates
Long term capital gains	More than one year	Lower rates of 0%, 15% or 20% depending on income
Net investment income tax	Applies above certain income levels	An additional 3.8%

Most active trading produces short term gains, which are taxed more heavily than long term investing gains.

Capital losses#

Losses offset gains of the same type first, then the other type.
Net capital losses can offset up to $3,000 of ordinary income per year ($1,500 if married filing separately).
Unused losses carry forward to future years.
The wash sale rule can disallow losses if you rebuy substantially identical securities within 30 days. See Wash Sale Rule.

Futures and Section 1256 contracts#

Regulated futures contracts, broad based index options and certain other contracts fall under Section 1256 of the US tax code:

Feature	Treatment
Gains and losses	60% long term and 40% short term, regardless of holding period
Year end	Open positions are marked to market as if sold at year end
Wash sale rule	Does not apply

Crypto taxes in the US#

The IRS treats crypto as property. Selling, trading one coin for another or spending crypto can be taxable events, with short or long term treatment by holding period. Staking and mining rewards are generally taxed as income when received. Brokers are required to report certain digital asset transactions on Form 1099 DA, starting with transactions in 2025. See Crypto Trading and Staking and Restaking.

Trader tax status#

The IRS may treat very active traders as being in the business of trading if they trade substantially, regularly and continuously. Qualifying traders can deduct certain business expenses and may elect mark to market accounting under Section 475(f), which treats gains and losses as ordinary and removes the wash sale rule and the $3,000 loss limit for those securities. The criteria are strict and the election has deadlines, so professional advice is important.

UK basics#

Item	Treatment (summary)
Capital gains tax	Applies to gains on shares, crypto and other assets above an annual exempt amount, which has been cut to £3,000
ISAs	Gains and income inside an ISA are tax free
Spread betting	Profits are generally free of capital gains tax for most individuals, because it is treated as gambling, though losses are not deductible
CFDs	Gains are subject to capital gains tax, and losses can offset gains
Share matching rules	Same day and 30 day "bed and breakfasting" rules affect gains calculations

Rates and allowances change with each budget. See CFD Trading.

Practical steps#

Keep complete records of every trade, fee and transfer. See Record Keeping for Traders.
Understand your cost basis method (FIFO, specific identification or average cost).
Track wash sales and holding periods.
Set aside money for taxes after profitable periods.
Use tax advantaged accounts where suitable.
Get professional advice for complex situations.

Frequently asked questions#

How are day trading profits taxed in the US?#

Usually as short term capital gains at ordinary income rates, unless the trader qualifies for and elects special treatment.

What is the 60/40 rule for futures?#

Gains and losses on Section 1256 contracts, such as regulated futures, are treated as 60% long term and 40% short term regardless of how long they were held.

Do I pay tax on crypto trades?#

In the US and many other countries, selling or exchanging crypto can create taxable gains or losses; rules vary by country.

Next, learn about a key rule for losses in Wash Sale Rule.

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Next lessonWash Sale RuleThe US wash sale rule disallows a loss if you buy the same or a substantially identical security within 30 days. Learn how it works, cost basis effects and traps.