Day Trading Stocks Taxes
Taxes on Day Trading Stocks
Governments in developed countries impose taxes on any income generated by individuals as well as businesses. Any form of income and earnings are subject to taxes. Almost all countries impose taxes on the earnings of their residents, with few exceptions. The countries that do not charge any taxes on the income include the UAE, Oman, Bahrain, Qatar, and Kuwait, and a handful of others.
Therefore, if you are in any country other than the few mentioned above, you are liable to pay taxes to the government on all forms of earnings. Income from day trading, like other forms of income, is also subject to taxes, if the trading resulted in net profits.
The rate, type, and structure of taxes varies from country to country. The amount of tax levied on the same income will differ depending on whether the business or individual is in the US or Europe. The United States has separate federal, state, and local government income taxes, while in European countries such as France, tax rates are determined by the Parliament and collected by public administration only at the national level.
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How Does Day Trading Affect Taxes in the USA
Day trading is a dynamic process, with high risks and high rewards. A day trader can end up earning a large amount of money in a financial year, while it is also possible that he suffers significant losses at the end of the fiscal year.
One of the most significant points here is that the rules differ for traders and investors. For a person to qualify as a trader under the IRS regulations, he must make at least four trades per day, four days a week, with an average holding period of less than 31 days. He must also have a significant value of account, and should be day trading as his main business.
When a person qualifies as a trader under the above-mentioned criteria, day trading can affect taxes in one of these two ways:
- When Day Trading Leads to Profits
When the day traders end the year in profits, the income is considered as short-term capital gain as the assets were held for less than one year. The short-term capital gains are taxed at the ordinary income rate, depending on a taxpayer’s income bracket.
As an overall benefit, the traders who are in the business of buying and selling securities can write-off all their trading-related expenses as business expenses. There are no taxes on this amount, and the gross income also gets reduced by the amount of the expenses. These expenses can include a home office for the business, margin account interest, and software and equipment used for trading.
- When Day Trading Leads to Losses
If a person qualifies to be a trader under the IRS regulations, he is eligible to receive certain valuable tax benefits.
Losses incurred in day trading can be reduced from the taxable income of the day trader if the trader has made a mark-to-market election with the IRS under Section 145. This election exempts the traders from the wash-sale rule.
The wash-sale rule implies that if the trader buys or sells the same stock, 30 days before or after the transaction that incurred him a loss, it is called wash-sale. Such a loss is not eligible to be written off. However, traders with mark-to-market election filed by the deadline of a financial year are exempted from the wash-sale rule.
At the same time, mark-to-market traders are eligible to write-off unlimited amount of losses from their taxable income, while other investors can write-off only up to $3,000 of net capital losses in a particular year.
Other Forms of Day Trading Taxes
- Day Trading Futures Taxes
The tax benefits of futures traders for day traders are outstanding. The capital gains from futures trading are taxed at 60/40. This means that 40% of the gains from future trading are taxed at the same rate as short-term capital gains of 28%-35%, while the remaining 60% of the gains are taxed at the long-term capital gains rate of about 15%.
- Other assets that are not stocks
Taxation on other assets like forex and options is quite similar to day trading futures taxes. Forex options and futures are grouped under IRC Section 1256 and follow the 60/40 taxation rule, while forex spot traders are taxed under IRS Section 988 and treated as ordinary losses or gains.
To sum it up, along with understanding the intricacies of day trading, a trader should also have a detailed understanding of the taxation rules in his country. Governments ensure that the traders actually trade as a profession and not just to evade taxes before tax breaks are given to them. Once a person qualifies to be a trader, there are certain extra tax benefits, over and above the tax breaks given to ordinary investors.