But the upside is there is no limit on the amount of losses that can be deducted. But don't get too excited and claim everything from your trading software to the room in your house where you keep the computer. Investors, on the other hand, fill out Schedule D for capital gains and losses and Schedule A to itemize deductions for investment expenses. If the loss is more than the yearly limit, the portion that is not deducted can be carried over to later years until it is used up completely. But that won't do much to lessen the tax bite this year, if you had substantial gains.
Traders get another advantage when they declare themselves in business for themselves.
By doing this, traders calculate the market value of their portfolios at year end and adjust their basis in each security to what they would have sold for that day. Big losses on the last trading day means less taxes paid in April. But big gains equal a big tax bill. And once you choose to report your income this way, you can't change back without getting the IRS' permission. So, here's a quiz to help you figure out if you are a trader or an investor.