Ordinary Income Taxation

Ordinary income taxation applies to income derived from activities like wages, interest, and business profits, rather than long-term capital investments. When a trader makes a Section 475 election, their trading profits are categorized as ordinary income.

This means the gains are taxed at the trader's marginal income tax rate, which can be higher than the preferential rates often applied to long-term capital gains. Conversely, losses can be used to offset other ordinary income without the annual caps that apply to capital losses.

This structure is intended for businesses where trading is the primary source of income. It simplifies the reporting of frequent, short-term trading activity but removes the benefit of lower long-term tax rates.