Warning: which entity structure?

I made about $180K in crypto gains last year from active day trading. I am talking hundreds of trades per week across multiple exchanges and DeFi protocols. This year is looking similar or better. Currently I am filing everything as an individual and the tax bill was painful.

Someone in a trading Discord said I should set up an LLC or S-corp for my trading. The idea being that I could deduct more expenses, potentially get the QBI deduction, and have better tax treatment. Is any of this true? I am also wondering about the wash sale rules because I frequently sell at a loss and immediately buy back in.

There is a lot to unpack here so let me address each piece.

Wash sale rules: As of right now, the wash sale rule under IRC § 1091 technically does not apply to cryptocurrency because crypto is classified as property, not a security. This means you can sell crypto at a loss and immediately buy it back, realizing the loss for tax purposes. However, there is active legislation in Congress to extend wash sale rules to digital assets, and the IRS has signaled interest in this area. Do not assume this loophole will last forever.

Entity structure: An LLC taxed as an S-corp could work if you can characterize your trading as a “trade or business” under Section 475. To do this, you would need to make a mark-to-market (MTM) election under § 475(f). The MTM election means all positions are treated as sold at fair market value on the last day of the tax year, gains and losses are ordinary (not capital), and you avoid the $3,000 capital loss limitation.

QBI: If your trading activity qualifies as a trade or business, the income might be eligible for the 20% QBI deduction under Section 199A. However, QBI has income limitations ($191,950 single / $383,900 MFJ for 2024) and the “specified service trade or business” exclusion could apply. This is a complex area and you need a CPA who specializes in trader tax status.

The mark-to-market election is interesting. Does that mean I need to have the entity set up before I start trading for the year? And how does the MTM election interact with crypto that I am holding long-term in cold storage? I do not want to trigger gains on positions I am not actively trading.

Great question. The MTM election applies to positions held in connection with your trading business. If you keep your long-term holdings in a separate personal wallet and only conduct active trading through the entity, you can segregate them. The entity’s positions would be subject to MTM, and your personal long-term holds would not.

The § 475(f) election must be made by the due date of the prior year’s return (without extension). For a new entity, the election must be made within 75 days of the entity’s formation. So timing matters. You cannot retroactively elect MTM for last year imo.

I would strongly recommend working with an accountant who specializes in trader tax status. This is a niche area and general CPAs often get it wrong.

As someone who went down this road: the record-keeping is an absolute nightmare. If you are trading across multiple exchanges and DeFi protocols, you need software like Koinly, CoinTracker, or TokenTax to reconcile everything. And even then, DeFi transactions (swaps, liquidity pools, staking rewards, airdrops) are a mess to categorize correctly.

I spent more time on crypto tax prep last year than I did on actual trading. Make sure you factor in the cost of proper record-keeping when you are calculating whether the entity structure saves you money.

One more angle: if you go the S-corp route, you will need to pay yourself a reasonable salary just like any other S-corp. For a trader, that gets weird. What is a “reasonable salary” for someone who sits at home clicking buttons on exchanges? The IRS does not have clear guidance here and it is a gray area that could invite scrutiny.

Some trader CPAs recommend a relatively modest salary ($40K–$60K) with the remainder as distributions, but this is more aggressive than typical S-corp salary positions. Just know the risk.