Day trading can be lucrative for some, but it’s not for everybody. I’m no expert on day trading, however I am an expert on how to file taxes for day trading. If you were successful in your trades but don’t know how to file taxes for day trading, read on.
Most people who work in an office or any other place will have to file taxes during tax season. These people may not know how to file taxes for day trading. If a person knows how to determine costs and profits when trading, they will be able to file taxes easily. With a trader’s general journal and trading costs, they can see what they made and what they lost through the year.
Day trading is a great way to make money, but it’s also important to keep track of your profits and losses. This helps you know what you owe in taxes, and it can help you avoid paying too much or too little.
To file your taxes for day trading, you need to keep track of all of your trades and how much money they made or lost. You should also keep track of any expenses related to your trading–for example, if you had to pay for software or subscriptions that helped with your trading.
Once you’ve gathered this information and entered it into an accounting program like TurboTax or H&R Block, it will be easy for them to calculate how much money has been made on each trade and whether or not it’s taxable income or capital gains (which are taxed at different rates).
First, if you’re trading stocks or other securities, then the IRS considers that income and requires you to report it on your tax return. You’ll need to keep track of all your trades and sales throughout the year so that they can be reported on Schedule D when filing your taxes.
Second, if you have losses from trading activity during the year, then those losses can be used as deductions against other income sources (such as wages). If there are no other sources of income, then any loss amount cannot be deducted from anything else and will simply carry forward into future years until such time as there is enough income in order for those losses to be used up completely (which may take many years).
Day Trading Taxes — How to File
For those entirely new to financial markets, the basic distinction in tax structure is between long- and short term investments. Long-term investments, those held for more than a year, are taxed at a lower rate than trades held for less than a year, which are taxed at the normal income rate.
You can see a full breakdown of the rates in the chart below.
| Gross Annual Income | Long-Term Tax Rate | Regular Tax Rate |
| Up to $9,325 | 0% | 10% |
| $9,326 to $37,950 | 0% | 15% |
| $37,951 to $91,900 | 15% | 25% |
| $91,901 to $191,650 | 15% | 28% |
| $191,651 to $416,700 | 15% | 33% |
| $416,701 to $418,400 | 15% | 35% |
| $418,401 or more | 20% | 39.6% |
For accounting purposes as well as a variety of practical reasons, traders should maintain separate accounts for day trading and building a long-term investment portfolio.
Where to File
Traders must report gains and losses on form 8949 and Schedule D. You can deduct only $3,000 in net capital losses each year. However, if you’re married and use separate filing status then it’s $1,500.
Traders must provide receipts on the specific trades they claim as losses. And the wash sale rule states you can’t hold shares of that stock 30 days before or after the holding period you wish to claim them on a tax refund.
Schedule C should then have just expenses and zero income. Your trading profits are reflected on Schedule D. To prevent any confusion, you can include a statement detailing your situation.
Any losses over $3,000 can’t be claimed and are simply carried forward as a straight loss.
Traders Accounting
As a day trader, you’ve got so much to do — why worry about taxes, too? Trader’s Accounting specializes in offering a variety of tax preparation services specifically designed for active traders. These services allow you to receive maximum benefits from the IRS at tax time, which helps you generate more profits. Traders Accounting also offers wealth building and wealth preservation tools to prepare you for the future.
Outside of offering tax preparation services to our clients, it can also help you establish trading business entities. Starting an LLC for your trading business could maximize your trading dollars and increase the amount of money you’re able to keep in your own pocket at the end of the year. It’s important to stay in compliance with the IRS requirements, and Trader’s Accounting can help you create an LLC for your business entities.
Get Traders Accounting today.
TradeLog
TradeLog was designed by active traders, for active traders. But even the casual investor who has 40 or 50 trade records in a year can benefit from TradeLog’s software.
TradeLog can import an entire year with just a few clicks. It can import from your online brokerage trade history report instead of the gains and losses report. It allows you to 1st enter any open positions from last year, and then it goes to work matching each and every trade with speed and precision.
And if something isn’t right, TradeLog has an extensive suite of editing tools and powerful trade matching algorithms that make finding and correcting such things a breeze.
CryptoTrader.Tax
CryptoTrader.Tax is a simples, reliable crypto tax software and calculator.
Import your trades using the API import tool or upload your trade history file. CryptoTrader.Tax integrates with all major exchanges to make this process quick.
Then add your sources of cryptocurrency income from the tax year, and the software will calculate your gains from mining, staking, gifts, airdrops and forks. To finish up, download your transaction data, and download your completed crypto tax report. Your exported tax report will be ready to file yourself, or you can import the file with a popular software like TurboTax or TaxAct.
TaxBit
TaxBit can help you curate a seamless cryptocurrency tax experience. The software can facilitate issuing 1099s or reporting your own taxes, and it connects those processes with other data to create completed tax reports that are ready-to-file.
Its 2 versions, TaxBit Consumer and TaxBit Enterprise, interact also, so it’s easy to integrate across all of the platforms you use. You’ll find TaxBit’s APIs make it easy to automatically bring in your data.
The major benefit of TaxBit’s software is your ability to see the real-time tax impact of your transactions across any exchange you trade on.
Trader Tax Status Designation
You might qualify for Trader Tax Status (TTS) if you trade 30 hours or more out of a week and average more than 4 or 5 intraday trades per day for the better part of the tax year.
The designation is not guaranteed. Check out the IRS webpage for more information on TTS. This designation opens up a lot of opportunities for tax efficiency, because professional traders can report their trading income and liabilities as Schedule C business expenses. The direct benefits to this designation include the ability to deduct items such as trading and home office expenses.
Mark-to-Market Trader
The most drastic difference of TTS designation is the ability to deduct losses beyond the $3,000 allowed as capital losses. TTS designated traders must make a mark-to-market election on April 15 of the previous tax year, which permits you to count the total of all their trading gains and losses as business property on part II of IRS form 4797.
Traders who make this election are also exempt from the wash sale rule. Mark-to-market accounting only concerns the total of a tax year’s profits and losses. However, beyond making the election in the previous tax year, traders who choose the mark-to-market accounting method must pretend to sell all holdings at their current market price on the last trading day of the year and pretend to purchase them again once trading resumes in the new year. This is entirely a paper transaction, but has to be done to provide a total accounting of the business assets each year.
How Day Traders Can Reduce Taxes
Day trading can be a fulfilling and lucrative career. If you know what you’re doing, you can make a serious chunk of change. But with every financial success comes everyone’s favorite consequence: taxes. So how do day traders avoid taxes, or at least reduce them? There are a few different methods that you can use if you’re day trading to reduce your total tax bill. If you don’t want to leave things to chance, or just don’t want to worry about your tax obligations, consider hiring a financial advisor who can manage it for you.
What Is the Capital Gains Tax?
If you’re a successful trader, you’re going to have to pay on your earnings. Any profit you earn selling an investment could be subject to what is called the capital gains tax. So if you buy a stock for $20 and sell it for $25, you have $5 in capital gains that will be taxed.
Capital gains are taxed at different rates depending on how long you held the investment, also known as short-term and long-term rates. If you buy an asset and sell it within a year of buying it and your profit, you’re taxed at the short-term rate. Essentially, the profit is added to your yearly income and taxed at the same rate as your income. Depending on your tax bracket, short-term capital gains are taxed at 10% – 37%.
Long-term capital gains are profits you collected after selling an investment you held for over a year. These are taxed at a lower rate of 0% – 20% depending on your income. Now that we’ve defined capital gains tax, we can break down what it means to be a trader, so you can take full advantage of the IRS system.
What it Means to Be a Trader
Some people might consider themselves day traders but they may not qualify as one under the IRS rules. To be considered to be a trader by the IRS, you must meet three criteria:
- Seek profits in daily market movements from securities, not from dividends, interest or capital appreciation.
- Engage in substantial activity.
- Carry on the activity and regularity.
Buy-and-hold investing isn’t considered trading to the IRS. Traders must be active, making multiple trades a day, and usually holding securities for a shorter period. The tax status of a “trader” requires a lot of work, as well as a lot of money. The IRS will expect you to be making trades, as well as having substantial funds for trading.
The Mark-To-Market Method
The first way day traders avoid taxes is by using the mark-to-market method. This method takes advantage of the ability of day traders to offset capital gains with capital losses. Investors can get a tax deduction for any investments they lost money on and use that to avoid or reduce capital gains tax. Normally, you can only deduct up to $3,000 in losses. But the mark-to-market method allows traders to deduct more.
If you meet the above criteria for a trader, you can file an election to mark-to-market your securities or commodities. This allows you to deduct more than $3,000 in losses and lets you mark the value of the security to the new market value at the start of every year. Essentially, this resets any gains or losses to $0. The downside is that you won’t be able to carry over losses into the following year. However, the advantages of this method far outweigh any downsides.
Use the Wash-Sale Exemption
Many investors sell off losing assets to offset gains. Because of this, the IRS prevents many investors from selling investments at a loss and then buying the same asset within 30 days of the sale.
If you’re using mark-to-market, however, you’re exempt from this rule. You can offset your gains by selling off assets, regardless of whether you’ve just purchased them. Day traders can use this to their advantage. For instance, if they speculate a company’s stock is going to dip after their quarterly earnings call in a few days, they can buy the stock and sell it when it dips, counting the loss as a tax write-off. Of course, this comes with risk.
Deduct Business Expenses
The last method of reducing taxes is by taking advantage of the fact that they are operating a business. This means that they reduce their total tax bill by deducting qualified business expenses from their annual taxes. Things like internet service, a computer, as well as any software or trading services can possibly all be deducted. If you have a designated home office, you may also be able to deduct part of your mortgage. You can work with a financial advisor who is experienced in working with businesses to learn more about how it could work for your situation.
The Bottom Line
Active day traders can avoid taxes in a few different ways. By taking advantage of the IRS system of deductions, you can lessen your tax burden. If you file an election to mark-to-market, you can record losses over $3,000, reset your gains and losses yearly and are exempt from the wash-sale rule. Along with these niche tax deductions, you can file for business-related tax deductions, such as the cost of your investing software or your internet bill. When added up, day traders can avoid or at least reduce the amount of capital gains tax they will have to pay.