For a lot of new investors, they see day trading as a great way to earn funds and money really quickly.
The concept behind it is to make trades over a short period of time, then you can take full advantage of the short term price changes and make a profit at the same time.
For a day trader, the results can vary day to day. Some days there will be more losses than gains.
However, with the unpredictability of day traders, this can have a massive effect on their taxes as well. Everyone has to pay taxes, if they are earning an income.
In this article, we will be discussing whether day traders have to pay taxes and how day trading impacts them.
Do Day Traders Pay Taxes?
A profitable day trader must pay taxes on any of their income or earnings that they receive.
However, by having to pay taxes, this can then reduce the amount of profit a day trader has made even more.
Unfortunately, day trading does not qualify the individuals for any favorable tax treatment compared with gold buying and long term buying.
Long Term And Short Term Investments With Taxes
For day trading, there is a very distinct structure between short term and long term investments.
Long term investments are typically held for more than a year and are generally taxed at a much lower rate as well.
Compared to trades that are held for less than a year, which are seen as short term investments. These investments are taxed at normal income rate.
It is recommended that day traders keep two separate accounts of day trading, which would be your short term investments and your long term investments.
Especially as they both get taxed differently.
The following is how your income could be affected by a long term or regular tax rate.
Up to $37,950 your long term tax rate remains at 0%. However, up to $9,325 the regular tax rate is 10% and then jumps to 15% once your gross annual income reaches between $9,326 and $37,950.
After this point, the tax rates start to increase on both long term island regular tax rates.
Between $37,951 and$4118,400 your long term tax rate is only 15%, if you earn more than that then the rate is 20%.
However, with the regular tax rate, these figures are the following:
- £37,951 – $91,900 = 25%
- $91,901 – $191,650 = 28%
- $191,651 – $416,700 = 33%
- $416,701 – $418,400 = 35%
- Over $418,401 = 39.6%
Can Day Traders Get Any Help With Their Taxes?
In some rare scenarios, a day trader could try to apply for a special day trader treatment for their taxes. This would be done by speaking to the IRS.
If successful, the day trader could potentially reduce some of their tax and make more net profit, which could then be subject to self-employment tax instead.
For day traders who don’t qualify for tax benefits, they must then follow these rules.
Gains And Losses
Day traders must pay taxes on any investment gains in the tax year that you sell your trades.
In addition to that, you can offset any of your capital gains against any of your losses. Although, you can’t do this if your gains are a higher amount than your losses.
The rules state that you can use around $3,000 in excess losses every year, which can then offset any other kind of ordinary income such as self-employment income, wages or interest that you fill out on your tax returns.
Any remaining losses can be carried over to the following tax year.
Holding Investments Time Scale
As mentioned above, how long you hold your investments for can affect the tax that you have to pay on them.
Therefore, if you hold your investments for less than a year, then regular income tax will apply to any gains these investments make.
However, if you hold any investments for longer than a year, it allows day traders to take full advantage of the long term tax rates.
With that being said, some long term investors can try to defer or avoid these taxes even more by holding their long term investments in a tax advantaged account.
These include Roth IRA accounts and 401k accounts.
Pay Taxes For Distributions
Any kind of distributions such as dividend distributions and capital gain distributions require for the investor to pay taxes the year that these distributions are paid out.
Long Term Investment Is Better Than Day Trading
A lot of experts have argued that long term investments are a much better option than day trading, especially when it comes to taxes.
This is because when it comes to long term investments you can take full advantage of long term tax rates, which are much lower than the regular income tax, that you will have to pay if you have an investment for a year or less.
Therefore, with long term investments, you can save yourself money on your taxes and your overall net profit.
In addition to that, if you hold your long term investments in a tax advantaged bank account, then you can actually pay even less tax, while receiving more benefits.
Some people like the thrill of day trading and short term investments, but it does mean you have to pay more tax on any gains that you receive.
If you are earning any kind of income, then you need to pay taxes. However, for day traders, their taxes are a little more complicated.
For a day trader, their gross annual income will be taxed, yet it depends on the type of investments that they have on how much they will be taxed.
We hope this article has been useful, and you now understand that day trader do need to pay taxes.