Day trading and taxes?

[Maverickz]

Quote from kmkkra:

Hello to anyone who reads this...

I have an account with TD Ameritrade, and I have been thinking of becoming a pattern day trader. However I have been a little concerned about how this will affect my taxes and other aspects of my trading and/or trading account.

Questions:
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(1) I was wondering, in what ways will being flagged as a pattern day trader effect my taxes.

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(2) Will my tax rate go up, and if so how much (I am a single male with no kids, and I make under $20,000 a year).

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(3) If I should some how come up with a phenomenal strategy to trade stocks, and I should make over $200,000 or much more in one year, what might my tax rate be like then?

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I had once read an article at Reuters.com that seemed to be saying that certain short term traders actually pay a lesser tax percentage than long term traders because these certain short term traders were trading as a job and it was there only source of income. Whereas long term traders where trading for a hobby or just to make a little easy money on the side of their regular job. The article labled short term traders as "traders" and long term as "investors".

I have also heard the exact opposite, where short term traders pay a higher tax percentage than long term traders because trading is not considered work, and that it is a means of fast and easy money.


(4) Which of these statements are true?


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Thank you VERY MUCH for your time and consideration.....

Very simple question: If you could make 200k even though it might be taxed at a 50% rate thus leaving you with 100k a year or you could keep making your 20k/yr TAXFREE...which would you do?

My point is make the money first then worry about the taxes.

 

[Trader666]

If googling a simple tax question would cause you ANY anxiety, I seriously doubt trading is for you.

Quote from kmkkra:

The reason I started this thread was because I have an extreme anxiety problem and it really makes learning difficult...

...However, if in my current mental condition, I find it hard to either find an answer or to find a straight and definite answer, I suppose I will still start another thread, regardless...

 

[lindq]

Quote from kmkkra:


I had once read an article at Reuters.com that seemed to be saying that certain short term traders actually pay a lesser tax percentage than long term traders because these certain short term traders were trading as a job and it was there only source of income.

The IRS doesn't care if you are considered a pattern day trader, a swing trader, whatever. That's an issue for your broker.

The issue of a lesser tax is entirely related to your ability to file with the IRS as a "Trader in Securities". If you can, then your income is not considered "earned income", and you pay no self employment tax or social security tax. And that's a large tax savings. But to gain this status you need to prove that (1) You trade frequently, and (2) It is your primary source of income.

However, if your income is mainly derived from a source other than trading, the frequency of your trades (other than the usual short or long term cap gain tax rates) has no impact on your taxes. It is simply capital gains, and you pay the appropriate tax on capital gains along with your regular earned income from employment.

 

[Beebers]

Well, it depends on what you are trading. Futures are taxed differently than stocks (schedule 1256 vs. schedule D I believe - sorry, I had some sake ....).

In any case, you are also touching upon the subject of passive income (investment income) versus a business such as day trading (as a business).

I think IB had a seminar on it (which is in its archives, or maybe the CME in its educational section - check into it) - very illuminating.

Good luck

 

[shortie]

Quote from lindq:

The IRS doesn't care if you are considered a pattern day trader, a swing trader, whatever. That's an issue for your broker.

The issue of a lesser tax is entirely related to your ability to file with the IRS as a "Trader in Securities". If you can, then your income is not considered "earned income", and you pay no self employment tax or social security tax. And that's a large tax savings. But to gain this status you need to prove that (1) You trade frequently, and (2) It is your primary source of income.

....

has anybody with a day job been successful in getting "Trader status"? If the income is 50/50 trading/W-2, will IRS agree to Trader status? 25/75 trading/W-2? I assume that the demand on trading frequently is met ($50M short-term trades per year, trading pretty much everyday).

 

[Bob111]

The issue of a lesser tax is entirely related to your ability to file with the IRS as a "Trader in Securities". If you can, then your income is not considered "earned income", and you pay no self employment tax or social security tax. And that's a large tax savings. But to gain this status you need to prove that (1) You trade frequently, and (2) It is your primary source of income.

who told you , that you have to pay self employment tax? or soc.sec tax if you day trade?

show me a "large tax savings" difference between filing as a "trader" and married average joe,filing jointly(if you spouse work and you trade)

 

[scriabinop23]

Quote from lindq:

The issue of a lesser tax is entirely related to your ability to file with the IRS as a "Trader in Securities". If you can, then your income is not considered "earned income", and you pay no self employment tax or social security tax. And that's a large tax savings. But to gain this status you need to prove that (1) You trade frequently, and (2) It is your primary source of income.

yea i'll second the other poster.

Both sch D (non trader status) and doing a 4797 (trader status) are not 'earned income'. You pay self employment tax on neither.

The benefit of trader status has to do with the ability to:

1) treat your trading expenses (computer, internet line, subscriptions, research, etc) as expenses on your schedule C.

2) being able to carryback or carry forward trading losses with no concern of arbitrary 3K/year loss limitations that pertain to schedule D filing instead.

 

[hughb]

Ah, now this is the info I've been trying to confirm.

Are you guys sure that a person with trader status from the IRS pays no social security taxes? I didn't find that on the IRS website the last time I looked. Any links to their site would be appreciated.

 

[Bob111]

Quote from hughb:

Ah, now this is the info I've been trying to confirm.

Are you guys sure that a person with trader status from the IRS pays no social security taxes? I didn't find that on the IRS website the last time I looked. Any links to their site would be appreciated.

i'm sure that average joe in example above pays no soc.sec taxes..only thing i know about trader status(talk about it here long time ago) that you are 99% audit guarantee. so -go head, deduct 10-15-20K in computer\internet expenses..

 

[hughb]

Make no mistake - I do not daytrade and am not seeking trader status from the IRS. I've always had the opinion that someone with trader status would be forced to pay social security, medicare, etc. It looks like I was wrong.