Day trading is a very popular form of investment. During the first Covid-19 lockdown, this was a form of investment that a lot of people decided to take up as they suddenly had a lot of time on their hands, which they didn’t have before.
A lot of people dived head first into day trading without doing any research, which is why many people are now being met by unexpected tax bills.
When you make a profit through selling your stocks, then you will need to pay tax on this, which is something that a lot of new day traders weren’t actually aware of.
There is a lot of confusion surrounding the tax that is paid by day traders. In this guide, we’ll be taking a look at exactly what a day trader is, and whether, or not, they have to pay self-employment tax. So, if you want to find out more, keep on reading!
What Is A Day Trader?
First things first, let’s take a look at what a day trader is. Well as the name suggests, a day trader is an individual who participates in the act of day trading. So, let’s take a look at what day trading is.
Day trading is an investment route that has become very popular in recent years. Unlike traditional investing, where you buy stocks/shares and hold onto them for a long period, day trading is entirely different.
When you day-trade, you buy and sell a financial instrument within the exact same calendar day. So you will start the day with nothing, and end the day with nothing.
Day trading is intense and it is risky too. However, this style of investment only works because of the risk. Sometimes the risk will pay off and you will make a large profit, however most of the time, the profit will be small – and this is the idea of day trading.
It can take years to become an incredibly successful day trader, but even if you only make a small profit each day, over time this will add up.
Do Day Traders Pay Self Employment Tax?
Now that we know exactly what a day trader is, let’s take a look at if day traders have to pay self-employment tax. Day trading is something that causes a lot of confusion to people, especially when it comes to taxes, so let’s find out more.
If you make money from selling stocks/shares, you will be required to pay tax on any profit that you make. However, you will not be required to pay self employment taxes. Most people who day trade do so casually, and it is not their main source of income.
So, they are not technically self-employed, which means they will not have to pay self employment tax.
However, all traders will be required to pay tax. If you make any money through buying and selling financial instruments, such as stocks and shares, you will be required to pay something called capital gains tax.
What Is Capital Gains Tax?
Capital gains tax is a tax that is paid on any gains that are made from the sale of a financial asset. So, if you buy/sell any stocks, shares, bonds, etc. you will be required to pay capital gains tax.
There are two types of capital gains tax, short-term and long-term capital gains tax. Short-term capital gains tax is paid on assets held for less than a year, whereas long-term capital gains applies to assets held for longer than a year.
As day trading requires the purchase and sale of assets all in a single day, you will be required to pay short-term capital gains tax on any profits that you make upon the sale of your asset.
This does put you at a slight disadvantage as short-term capital gains tax is charged at a higher rate than long-term capital gains tax.
So, if you are a day trader, you will be required to pay short-term capital gains tax on what you trade.
The fact that you are a day trader will also be taken into account with your adjusted gross income (AGI), which means that your tax bracket might be impacted by day trading.
However, you will not be required to pay self-employed tax if you are a day trader.
Filing Day Trading Taxes
If you are new to day trading, then you might be wondering how you go about filing your taxes for this activity. This is surprisingly easy because short-term capital gains tax is charged at your regular tax bracket.
So as long as you know what tax bracket you are in, calculating the amount of tax you will need to pay on your day trading profits is simple.
Your day trading activity should be reported on form 8949 and schedule D. When reporting your activity on this tax form, you can deduct up to $3,000 for net capital losses each year, unless filing jointly with a spouse.
If you are filing jointly then this will be capped at $1,500. If you claim any losses, then you will need to provide receipts for these losses.
If you are pretty good at filing your taxes, then filing day trading taxes shouldn’t be too difficult. But if taxes are something that you find complicated, then you can employ somebody to file your day trading tax forms for you.
If you are a regular day trader, then this is a good idea to avoid making any mistakes on your tax returns. As you know, filing your taxes correctly is incredibly important, which is why it is definitely worth considering employing somebody to do them for you.
In short, no day traders do not have to pay self-employment tax. However, they will be required to pay capital gains tax on any money that they make from day trading.
In this guide, we have taken a look at everything that you need to know about this. So check out the guide above to find out more.