One of the more popular trends that we have seen over the last couple of years is day trading. This method of buying and selling financial securities in a short amount of time for a profit is making ripples across financial markets. Many people have started to day trade to make extra cash on the side of their current jobs. Also, people that do not work, like college students, have started day trading for fun. If you have done any day trading, you should be wondering how it will affect your taxes. Here we will detail everything you need to know about day trading income tax.
What even is day trading?
Day trading is a pretty simple concept. This method of investing is when you open and close a financial position in the stock market within a 24 hour period. If you buy a stock in the morning and sell it by market close, then this is day trading. Day trading can be extremely profitable, however there are also some risks to consider.
Many day trader’s do not look at how profitable a company is, or care about long term results. Instead they look at trading history and trends to predict the stock’s next move. They use something called technical analysis which can help you forecast if a stock is going to move up or down.
Details of Day Trading Income Tax
Day trading will have an impact on your taxes. There really is no way to get around paying taxes on any day trading profit.
If you have held an asset for less than a year, which is the case with any day trader, then you must pay the IRS. It does not matter what type of financial security you held either. You can have held stocks, bonds, mutual funds, or more. If you make any sort of gain on a short term position, you will have to pay taxes on it.
You may even get put into a new tax bracket if you are making some series income on the side. If this is the case, then you will have to pay even more taxes.
Plan Ahead
If you are day trading and are making a decent amount of money, you really should be planning ahead. Depending on how much profits you earn from day trading, you could owe several hundred or several thousand dollars to the IRS. Getting lucky in the stock market unfortunately always comes with a price.
The best advice we can give you is to do your research and due diligence. You can do this by reading up on tax laws and understand how your gains will be perceived by the IRS. Even if you’re a trader full-time, the government doesn’t consider your profit earned income. This means you will get around the self-employed tax that freelancers dread. However you will have to pay investment income and capital gains tax.
For someone with a limited investment history, the tax liability can exceed their profit. This is why planning ahead and investing wisely is so crucial. It doesn’t just help you earn more in the short-term but also ensures you’ll keep your income in the long-run. If you get put into a higher tax bracket you may want to use overlooked tax deductions to lower your taxable income.
Day Trading Income Tax – Summary
Day trading can be a fun way to make some extra money on the side of your regular job. It can even be lucrative enough so that you do it full time to support yourself. Either way, you are going to have to pay taxes on the profits you earn. Short term capital gains are usually taxed at your normal income tax rate. This is different than long term capital gains (gains earned on investments held for more than a year). Long term capital gains are taxed differently and are usually under 15%.
There is a lot to know about day trading income tax. If you have any questions be sure to reach out to your accountant. At the end of the day, the day trading income you make may end up costing you more in taxes then it is worth.