Is Day Trading Legal?
Day trading can be a very profitable activity if done right, and also a very exciting way to make money. Before diving in and getting started, many people ask themselves “is day trading legal?”.
The answer is yes, day trading is perfectly legal. In fact, the stuff that goes into day trading is done every day by regular employees of investment banks, who are referred to as “stock traders” or simply “traders”. They go through the same process as day traders, and what they do is considered perfectly legal.
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Pay Capital Gain Taxes On The Day Trading Gains
Even though day trading is legal, you will need to pay taxes on your day trading gains, since you are required to declare your capital gains for tax purposes. As long as you are doing this responsibly, you shouldn’t have much legal trouble with day trading. Make sure to stay informed on all the tax obligations for your region, and you should be fine.
If you don’t pay your taxes, there’s a chance you will be audited, and you could be slapped with hefty fines, in addition to having to pay the tax money that you owe.
Avoid Doing Illegal Actions Monitored By The SEC (or FCA)
Although day trading is legal, there are a few ways that you can land yourself in hot water by trading unethically. This stuff typically deals with manipulating stock prices artificially, or trading with insider information, which is considered unethical.
Illegal activities are monitored by the Securities and Exchange Commission (in the US) and by a number of commissions in Europe, most notably the FCA (Financial Conduct Authority). Examples of illegal trading include:
- · Pumping and dumping. This is the practice of promoting a stock that you hold, in order to generate hype and raise the price of the stock, before selling off all of your holdings. This is considered an unethical way of manipulating stock prices, and is illegal as a result
- · Spoofing. Spoofers use trading algorithms to bid or offer with intent to cancel before execution. By feigning interest and canceling prematurely, spoofers can manipulate market activity around a certain stock, and profit by timing their own buying and selling.
- · Insider Trading. This refers to trading of a public company’s securities by individuals with non-public information about that company. This is the classic example of legal issues in day trading.
These are a few of the main illegal actions that day traders can get caught up in. Keeping yourself informed on the laws and scams out there is something you will definitely want to stay on top of if you want to be an effective day trader.
There Are Region Specific Rules
Of course, you will want to study all the particular laws that are relevant to your specific region. Different areas of the world have different laws and obligations that day traders must fulfill. Typically, these rules have more to do with taxation than anything else.
- In the US, for example, there is the rule about “pattern day trading”, which is monitored by the Financial Industry Regulation Authority (FINRA). Pattern day traders make more than three day trades in five business days, with the number of day trades being more than 6% of your total trades during the same period. Pattern day traders have special requirements for things like minimum account balances.
- For Canada, there are rules such as the “30-day rule”, or “superficial loss rule”, which states that traders cannot claim a capital loss when superficial loss occurs in the same 30-day period. The point of the rule is to prevent taxpayers from performing artificial transactions to cause an immediate loss of capital.
- In Europe, there are a number of different financial authorities that all have different regulations that they enforce. One of the main ones is the Financial Conduct Authority, based in the UK. This is a fairly new body, which came into its current form in 2013. The FCA monitors trade in the UK to ensure supervision and enhancement of financial markets.
- For Australia, trading is monitored and regulated by the Australian Securities and Investments Commission, which came into effect as part of the ASIC act of 2001. The commission reports to the treasurer, and is responsible for the oversight of corporate governance, financial services, securities, insurance, consumer protection, and financial literacy.
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