Plain-English definitions for the tax and trading acronyms that show up in the Journal, Budget, and across TradingWithHak. Every term cites its IRS source.
Educational only — not tax advice. These definitions are simplified for learning. Tax law has exceptions, edge cases, and state-specific variations that aren't covered here. Consult a licensed CPA before making decisions specific to your situation.
Profit on an investment you held for one year or less before selling. Taxed at your ordinary-income rate — same rate as your salary.
How it worksSTCG stacks on top of your other income. If your salary puts you in the 22% bracket, your next dollar of STCG is taxed at 22%. Big trading year? You can push yourself up into 24% or higher.
ExampleYou buy 100 shares of XYZ at $50 in March and sell them in September (6 months later) at $70. Gain = (70 − 50) × 100 = $2,000. If your salary has you in the 22% bracket, the tax on that gain is $2,000 × 22% = $440.
Profit on an investment you held for more than one year before selling. Taxed at preferred rates — 0%, 15%, or 20% — usually lower than your ordinary-income rate.
How it worksThe LTCG rate tier depends on your total taxable income. In 2026 (MFJ): 0% up to $98,900 of taxable income, 15% up to $613,700, 20% above that. Most middle-income investors pay 15%.
ExampleSame XYZ trade as above, but you held for 18 months before selling. Gain = $2,000. At the 15% LTCG rate, tax = $300. That's $140 less than the STCG version — the reward for holding long enough.
Cash a company pays you for owning its stock. Qualified dividends are taxed at the same low rates as LTCG (0/15/20%). Ordinary dividends are taxed like a paycheck.
How it worksTo qualify, you have to hold the stock for more than 60 days during the 121-day window around the ex-dividend date (per IRS Pub 550). Day traders almost never hold long enough for qualified treatment. Dividends from most ETFs (SPY, QQQ, VOO) and blue-chip US stocks held past the window are qualified.
ExampleYou own 1,000 shares of SPY and receive $1,500 in dividends this year. If you held them across the qualifying window, that $1,500 is taxed at 15% (LTCG rate) = $225. If you were a day trader flipping SPY, those same dividends would be ordinary income — 22%+ bracket = $330+.
An extra 3.8% tax on investment income — capital gains, dividends, rental income — that kicks in only if your income is above a threshold.
How it worksThresholds (based on MAGI): Single $200k · MFJ $250k · MFS $125k · HOH $200k. Below the threshold you owe zero. Above it, you owe 3.8% on the lesser of: your total investment income, OR the amount your MAGI exceeds the threshold.
ExampleMFJ couple with $300k MAGI (earned + investment). $50k of that is investment income. Their MAGI is $50k over the $250k threshold. They owe NIIT on the lesser of $50k (investment income) or $50k (excess) — so $50k × 3.8% = $1,900 in addition to regular capital-gains tax.
Two versions of "what the IRS calls your income." AGI is your total income minus specific above-the-line deductions (student loan interest, HSA contributions, traditional IRA contributions). MAGI is AGI with a few things added back — used for phaseouts like Roth IRA eligibility and NIIT.
How it worksTotal income (wages + trading gains + dividends + rental + etc.) → subtract adjustments → AGI. Then add back things like foreign earned income exclusion and student loan interest deduction → MAGI. Most traders' MAGI is close to their AGI — the adjustments only matter if you use them.
ExampleW-2 $80k + trading gains $30k + dividends $3k = $113k total. HSA contribution $4,400 (TY 2026 self-only, Rev. Proc. 2025-19) and traditional IRA $7,500 (TY 2026, IRS Notice 2025-67) = $11,900 in adjustments. AGI = $101,100. If no special add-backs apply, MAGI = $101,100 too.
Your marital / household status as of December 31. Determines your tax brackets, standard deduction, and phaseout thresholds.
How it works • Single — unmarried, no dependents.
• MFJ (Married Filing Jointly) — married, both spouses file one combined return. Usually lower total tax.
• MFS (Married Filing Separately) — married, each spouse files alone. Can make sense when one has large medical bills, but generally results in higher total tax.
• HOH (Head of Household) — unmarried with a qualifying dependent you support. Better brackets than Single.
Example$100k taxable income in 2026: Single hits 22% bracket starting at $50,400. MFJ doesn't hit 22% until $100,800 — so the same $100k of income produces a much lower tax bill filing jointly than filing single.
Quarterly prepayments to the IRS for income that isn't covered by payroll withholding — like trading gains, self-employment, rental income. Required if you expect to owe $1,000+ at filing.
How it worksFour payments per year, due the 15th of the month after each "quarter." The IRS quarters aren't even — Q1 is 3 months, Q2 is 2 months, Q3 is 3 months, Q4 is 4 months. Pay via IRS Direct Pay, EFTPS, or mail.
ExampleActive trader, MFJ, projecting $40k in STCG this year on top of a W-2 that already has $15k withheld. Estimated tax on that $40k at 22% = $8,800. Safe-harbor path: send $8,800 / 4 = $2,200 each quarter. The four due dates: Apr 15 · Jun 15 · Sep 15 · Jan 15 (of the following year).
The rule that keeps you from getting hit with an underpayment penalty when your final tax bill is higher than what you prepaid through withholding + estimated payments.
How it worksYou hit safe harbor if your year's prepayments equal the lesser of:
• 90% of this year's total tax, OR
• 100% of last year's total tax (110% if your prior-year AGI was over $150k).
Even if you owe a huge amount in April, no penalty if you met one of these thresholds.
ExampleLast year's total tax was $18k, AGI was $140k (so the 100% rule applies, not 110%). This year you make it big and owe $50k total. If you prepaid $18k across the year (100% of last year), you hit safe harbor — you still owe $32k on April 15 but no penalty. Without safe harbor, the IRS charges ~7% annualized on the underpayment.
If you sell a stock for a loss and buy "substantially identical" stock within 30 days before or after the sale, the loss is disallowed — you don't get to deduct it this year. Instead it's added to the cost basis of the replacement shares.
How it worksThe 61-day window (30 before + the sale day + 30 after) catches traders who try to "harvest" a loss by selling and immediately rebuying. The IRS doesn't let you have the loss AND still own the position. Applies across accounts — even between your taxable account and your IRA.
ExampleYou buy XYZ at $100, watch it drop to $80, sell for a $2,000 loss, then buy back at $82 the next day because "it'll bounce." Wash sale triggered. You can't deduct the $2,000 loss. It's added to the new shares' basis, so your new cost is $82 + $20 = $102. You'll get the deduction eventually — when you sell the replacement shares in a non-wash way.
Certain contracts — broad-based index options (SPX, NDX), futures, and regulated futures options — get a special tax treatment: 60% taxed as LTCG, 40% taxed as STCG, regardless of how long you held them.
How it worksEven if you day-traded /ES for 3 minutes, the IRS still treats 60% of your gain as long-term. That's a big break for active traders. Plus, §1256 contracts are marked-to-market at year-end — unrealized gains/losses are taxed as if you sold.
Example$10,000 realized gain trading /ES futures (a §1256 contract). Treated as $6,000 LTCG + $4,000 STCG. At 15% LTCG + 22% STCG brackets: $900 + $880 = $1,780. Compare to all-STCG treatment on regular stock: $10,000 × 22% = $2,200. Saves ~$420.
What you paid for the shares you're selling. Matters when you've bought the same stock at different prices — you have to pick which shares you're "selling."
How it works • FIFO (First In, First Out) — default. Selling the oldest shares first. Usually biggest gain (oldest shares bought cheapest).
• LIFO (Last In, First Out) — selling newest shares first. Usually smallest gain or a loss.
• Specific ID — you tell your broker exactly which lot to sell. Best for tax optimization (sell the high-cost lots to minimize gain).
ExampleYou own 200 XYZ: 100 bought at $30, 100 bought at $60. Current price $70. You sell 100 shares. FIFO: sells the $30 lot, gain = $4,000. LIFO / Specific ID ($60 lot): gain = $1,000. Tax difference at 22% = $660. Specific ID needs to be elected at the time of sale — most brokers let you select lots in the trade ticket.
A special IRS classification for people who trade as their business, not just their investing hobby. Qualifying gets you ordinary business-expense deductions. Pairing it with a §475(f) mark-to-market election removes the wash sale rule entirely.
How it worksThe IRS has no formal form or application — TTS is a facts-and-circumstances test. The informal bar: hundreds of trades per year, hours per day actively trading, short average hold times, substantial account, regular continuous activity. With §475(f) election: all positions are marked-to-market at year-end, wash sale rule doesn't apply, but gains become ordinary income (no LTCG rates). Election must be filed by April 15 of the first year you want it to apply.
ExampleFull-time trader, 2,000+ trades/year, 4+ hours daily, average hold 2 days, $200k+ account. Likely qualifies for TTS — can deduct home office, trading platforms, data feeds, even some education costs. If they also elect §475(f), a $50k losing year becomes an ordinary loss (fully deductible against other income, no $3k/year cap) instead of a capital loss. Big deal.