If you are a day trader, the following day trader tax strategies are for you.
Are you in the habit of trading stocks frequently on a daily basis? If so, there are some things you need to understand about the way the US government views this habit. If not, you could find yourself consumed with paperwork come April 15, and your profits will shrink once the IRS takes its share.
Here are some things you need to know if you are an active investor seeking to reduce your tax bills.
Trader versus Investor
These words each have special meaning in the tax world and carry with them some positives and negatives. By IRS definition, most individuals are considered investors. However, if your days are spent buying and selling, you are more likely a trader. Having this title could save you some serious cash at tax time. What is more, your investing expenses, like computer and other home office equipment are fully deductible.
Are you a trader or an investor? According to an IRS spokesman, while the question may be clear, the answer is not. To define your status, you will need to examine guidelines found in court cases where this question has been addressed.
According to the courts, you are a trader if:
Trading is pretty much your full time job. In fact, it is preferred that you do not have another regular, full-time job. If you are buying and selling at least a handful of stocks each day, you could qualify as a part-time trader.
You have developed a pattern of making several trades each day that the markets are open.
Your goal is profiting from short-term shifts rather than dividend income or long-term gains.
In real world terms, if you are spending at least 20 hours per week and making around 1,000 short-term trades in a year, you are most likely going to be okay. However if you have no full-time job and spend around 30 hours a week with 5,000 short-term trades each year, even the IRS will most likely agree with your status as a trader. You can choose to be both a trader and an investor if you wish by segregating your long-term holdings and identifying them when you buy in so they do not taint your trader status.
Trading points
If you qualify as a trader, then from the perspective of the IRS, you are self-employed and can use Schedule C to deduct trading-related expenses just like any other sole proprietor. These Schedule C write offs reduce your adjusted gross income and that increases the odds you will be able to deduct personal exemptions and avail yourself of other tax breaks not available at higher levels of adjusted gross income.
Margin account interest can also be deducted on Schedule C, and more than 50 percent of the time, traders can take an immediate write off for home office equipment used in trading activities. As long as you are using a home office space regularly for trading and the deduction does not put you into a net loss position, you can also take a home office deduction. Further you are not required to pay a self-employment tax on the net profit from trading activities.
Traders are still required to report gains and losses on Schedule D and Form 8949. Also, you can only deduct $3,000 net capital losses per year, or $1,500 using the married filing separately status. Schedule C will contain no income and only show expenses with trading profits ending up on Schedule D. Attaching a statement to your tax return that explains the situation is also a recommended best practice.
Day Trader Taxes what you need to know