Question about day trading stocks and taxes:?

Question

I understand that if I trade the same stock 3 times daily (complete 3 buys and subsequently 3 sells of the same stock), I am classified as a "day trader", right? Also what are the tax implications as a day trader? Do the taxes for short term capital gains fall under ordinary income taxes for the year (if the securities are bought/sold within a year?) Also---would you need to figure taxes on each and every sell order, or are you taxed ONLY on your total gains for that year (maximum 35%)?

Just curious---thank you!

Answer 1

I will do the best I can to answer these questions.

Firstly, you are only allowed 3 day trades (yes, in and out same day) per every period of five business days (mon to fri, wed to tues, any).  Make sure you have $25000+ at all times.

Short term capital gains taxes from trading are very near income I believe, but I don't know this for sure (I believe it is 35%-40%, although I won't be trading live until next year so I won't know for sure).

You pay at the end of the year.  Also, your broker should keep records of your trades (get one that does).

You should go to the IRS site for more information (irs.gov).  I believe publication 550 better talks about capital gains (I was on it on Tuesday to do some research).  You may also like to know that stock and stock options gains are all taxed at the full short term rate, while gains on foreign exchange, futures, and I believe index futures as well are taxed at the 60:40 ratio (60% taxed as LONG term gains, rest as short).  If you fail to meet stock daytrading regulations, they don't apply to these instruments  as well. :-)

Best of luck.  You will find everything you need about taxes on the IRS site.  Explore it for a bit.

Answer 2

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Answer 3

Day-trading does not get special tax treatment.  A short term gain or loss is a short term gain or loss.  5 minutes or 5 months makes no difference.

Answer 4

Taxes are at ordinary income tax rates on your net gains.  Although wash sale rules can increase that amount.  There aren't special rules for day traders, but it helps to know the rules for stocks and bonds, and whether the IRS will allow you to incorporate your trading business (assuming you are profitable).  

Even though it isn't a special day trader rule, the main thing you need to watch out for as a day trader is the wash sale rules.  If you sell a stock at a loss, and buy it back less than 30 days later, you can't take the loss.  Instead, the loss is used as an increase in basis on the next purchase.  So lets say you buy 1 share of XYZ at $30, then sell it at $25.  You buy it back again at $30 within 30 days.  You would not count the $5 loss towards your net income, but your basis on the second purchase would be $35.  If you then sell the second batch of XYZ at $40, then it would be a profit.  You had a $5 loss on the first trade and a $10 gain on the second for a net gain of $5.  The first trade was a wash sale, but you'd have a taxable gain of $5 on the second trade.  So assuming you eventually turn a profit in a stock, you will be eventually paying taxes on that stock.  However, if you keep incurring losses, you won't be able to write those off until you sell a stock and don't buy it back for 30 days.  

Accounting, especially tracking wash sales can be difficult.   Software by Armencorp or Gainskeeper can help with this.  These programs download from most brokers, and prepare a correct Schedule D.  Although they can be expensive, it was worth it for me.  Saves a lot of hassle or accountants fees.  I've used Armencorp's product and been happy with it, but I think there may be other products on the market.  

As far as tax payments go, on the federal level, you need to have paid the lesser of 90% of your liability for next year or 100% of your prior year's taxes, or you will be hit with underpayment penalties.  If your income is greater than the prior year, and you have a job, you can avoid this by setting up your deductions from work so that they cover your prior year tax liability...although you may have to pay a significant tax bill in April, it'll make it so you won't have any penalties.  If you aren't working, then you'll have to make quarterly estimated tax payments.  The penalty rates aren't that high...equivalent of paying 5% interest, so you can make an argument for just hanging onto the money, paying the penalty,  and continuing to invest it.  

Estimated tax payments are due on April 15, June 15, September 15, and January 15 the next year.  You can pay the amount you owe every quarter, but if it isn't even, you'll have to file a schedule to back up what you made each quarter.  

Trading income is not subject to self employment tax (Social Security and Medicare).

Answer 5

You need to keep good records.  The company that you trade with often can provide the trading records in exactly the format you want to file with your taxes.

It's ordinary short-term capital gains (losses) I believe, and you would report the purchase and sale date as the same.  If you make a net gain, it doesn't have the advantageous lower tax rate that long-term gains have.  If you make a net loss, there is a limitation as to how much you can claim each year.

Answer 6

<<<I understand that if I trade the same stock 3 times daily (complete 3 buys and subsequently 3 sells of the same stock), I am classified as a "day trader", right?>>>

You will be classified as a day trader by SEC regulations. That is not the only situation that what will cause a day trader classification.

<<<Also what are the tax implications as a day trader?>>>

Nothing. The SEC day trader classification is not the same as filing taxes with the IRS as a trader. There are numerous implication of filing taxes as a trader. For more information, including the definition of a trader, see the "Tax Guide for Traders" at

http://www.fairmark.com/traders/index.ht...

<<<Do the taxes for short term capital gains fall under ordinary income taxes for the year (if the securities are bought/sold within a year?) >>>

I believe if you file as a trader all profits are ordinary income. Check the tax guide to confirm that.

<<<Also---would you need to figure taxes on each and every sell order, or are you taxed ONLY on your total gains for that year (maximum 35%)?>>>

You have to calculate the profit or loss every time you close a position. (If you "sell to open" you will determine your gain or loss when you "buy to close" instead of when you sell.) Each profit and loss will need to be reported, but you combine your profits and losses before calculating taxes.

<<<Also I understand that there are additional tax implications if I were to day trade stocks? (have to pay state taxes, soc sec taxes, etc--as if I were running my own business)? thanks.>>>

If you file as a trader with the IRS that is correct, but simply being classified as a day trader by the SEC regulations does not mean that you have to file taxes as a trader.

<<<Assuming I make money off each trade (unlikely, but lets assume anyway). Would I simply pay taxes at the end of the year, or pay every quarter?>>>

The requirments to pay taxes quarterly depends upon if you have had enough taxes withheld during the quarter. If you have not had enough taxes withhold you need to file a quarterly estimate. It does not matter if you are filing as a trader or not.

<<<For the exception of one individual, thank you everyone for your answers. Kevin S answered a key question, that you pay your taxes at the end of the year (I believe on the FULL gain of the amount---or deduct up to $3000 total for a loss---depending on what happens).>>>

Be careful. The $3,000 is for capital losses. If you file as a trader you do not have capital gains or losses.

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I am certainly not an expert on filing taxes as a trader, but it is clear to me that I know more about it than several other people responding.

You can probably get more informed responses by repeating your question on the message board at

http://www.fairmark.com/

where tax professionals often answer questions.