Tax Concepts for Traders: Words to Know Before You Ask a Professional

Before you read: Trading Plans, Journaling and Honest Backtesting

What you will learn

• General ideas such as realized and unrealized gains, cost basis and holding period.
• Why different products and accounts can be taxed differently.
• Why records matter, and why individual questions belong with a tax professional.

This lesson is general education about vocabulary. It is not tax advice. Tax rules differ by country, change over time and depend on each person’s situation. Ask a tax professional about your own case.

Realized, unrealized and cost basis

When does a gain “count”?

An unrealized gain or loss is the change in value of a position still held. A realized gain or loss occurs when the position is closed. Cost basis is what was paid, usually including certain costs, and is used to calculate a realized gain or loss. In many systems, only realized amounts are reported, though some products follow different rules.

A fictional example: shares bought for $1,000 plus a $5 commission have a cost basis of $1,005. If they are later sold for $1,200 minus a $5 commission, the amount realized is $1,195, and the realized gain is $1,195 − $1,005 = $190. Before the sale, any gain was unrealized. US federal rules have named exceptions to the “only when closed” idea. Section 1256 contracts, such as regulated futures contracts and broad-based stock index options, are generally treated as sold at fair market value on the last business day of the tax year. People who qualify as traders under IRS rules can also choose the section 475(f) mark-to-market method. Whether either applies to anyone is a question for a tax professional.

Holding periods and product types

Can two trades with the same profit be treated differently?

Many tax systems treat gains differently depending on how long a position was held. Some products, account types and trading activities can also have their own rules. In the United States, for example, a capital asset held more than one year generally gives a long-term gain or loss, and one held a year or less a short-term one. Section 1256 contracts, such as regulated futures and broad-based stock index options, follow a different rule: 60% of the capital gain or loss is generally treated as long-term and 40% as short-term, however long the position was held. The wash sale rules generally disallow a loss on stock or securities when substantially identical stock or securities are bought within 30 days before or after the sale. The details and their effect on a person are questions for a tax professional.

Why do records matter?

At year end, how will trades be reconstructed?

Brokers send annual tax forms, but records of trades, costs and transfers between brokers help check them. A journal kept for review can also help with reconciliation. Retirement and other special accounts follow their own rules.

Records diagram

Illustrative diagram constructed for teaching. Not real market data.

The diagram shows three boxes, trade records, broker statements and annual tax forms, with arrows to a final box labeled “ask a tax professional.” It contains no amounts or rates.

What this does not tell you about taxes

• Any tax rate, rule or form that applies to you.
• How to reduce taxes. That is advice, and it is not given here.
• Rules in any specific country or year.
• Ask a tax professional about your own situation.

Check yourself

1. What is the difference between a realized and an unrealized gain? Hint: is the position still open?
2. Why might two trades with the same profit be treated differently? Hint: time and product.
3. Who should answer questions about your own tax situation? Hint: not a lesson.

Last reviewed November 8, 2026. Spotted a mistake? Report an error.