Can Derivatives Traders Elect “Trader Status” and How Does It Affect Their Income Character?

Yes, a derivatives trader can qualify for "trader status" (Trader in Securities). This requires substantial, continuous, and regular trading activity for the purpose of profiting from short-term market swings.

If granted, the trader can elect to "mark-to-market" under Section 475(f). This election treats all gains and losses as ordinary income/loss, which is advantageous as it allows full deduction of losses against ordinary income without the $3,000 capital loss limitation.