Taxes are a complicated hoop for day traders to pass through when reporting profits and losses. Whether you’re trading full-time to make a living or just trying to shore up cash for yourlong-term savings, there are a variety of tax implications to consider.
Below are the some of the basics about trading and taxes that can help youoptimize your trading strategyand best navigate your compulsory payments to Uncle Sam.
Table of Contents
- Day Trading Taxes — How to File
- Where to File
- Trader Tax Status Designation
- Mark-to-Market Trader
- Investigate Your Taxation
- Frequently Asked Questions
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
- Traders Accounting
securely through Traders Accounting's website
securely through Traders Accounting's website
Best For:
Day traders
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
securely through TradeLog's website
securely through TradeLog's website
Best For:
active traders
Rating:
Read Review
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.
Get TradeLog today.
CryptoTrader.Tax
securely through CryptoTrader.Tax's website
securely through CryptoTrader.Tax's website
Best For:
Crypto Activity Data Aggregation
Rating:
Read Review
CryptoTrader.Tax is a simples, reliable crypto tax software and calculator.
Import your trades using the APIimport 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.
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TaxBit
- TaxBit
securely through TaxBit's website
securely through TaxBit's website
Best For:
Beginners and tax professionals
Rating:
Read Review
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.
Related content: How to Calculate Tax on 1099 Income
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 outthe 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.
Investigate Your Taxation
The details of tax code for traders are far from straightforward. There is plenty more you might want to investigate yourself.
Start with our guide to assess your current taxation situation and prepare for the future.
Frequently Asked Questions
Q
How is day trading taxed?
A
Day traders pay short-term capital gains of 28% on any profits. You can deduct your losses from the gains to come to the taxable amount.
Q
What forms do you use for reporting taxes from day trading?
A
The 2 forms used are Schedule D and Form 8949.
As a seasoned financial expert with a comprehensive understanding of the intricacies of trading and taxes, I'll delve into the key concepts outlined in the provided article to ensure a thorough and insightful explanation.
1. Long-Term vs. Short-Term Investments: The article rightly emphasizes the crucial distinction between long-term and short-term investments in the context of tax implications. Long-term investments, held for more than a year, are subject to lower tax rates compared to short-term trades, which are taxed at standard income rates. The tax rates are illustrated in a chart, highlighting the progressive nature of taxation based on gross annual income.
2. Reporting Gains and Losses: To fulfill tax obligations, traders must report gains and losses on IRS Form 8949 and Schedule D. The article provides clarity on the limit of deducting only $3,000 in net capital losses annually, with a reduced limit for married individuals filing separately. Importantly, traders need to provide specific trade receipts, and adherence to the wash sale rule is crucial, preventing the holding of shares 30 days before or after the claimed holding period for a tax refund.
3. Trader Tax Status (TTS) Designation: The article introduces the concept of Trader Tax Status (TTS), which can be obtained by trading 30 hours or more per week and averaging more than 4 or 5 intraday trades daily for the majority of the tax year. Gaining TTS opens opportunities for tax efficiency, allowing professional traders to report income and liabilities as Schedule C business expenses.
4. Mark-to-Market Trader: A significant aspect highlighted is the Mark-to-Market Trader designation, which permits TTS designated traders to deduct losses beyond the $3,000 limit. Traders making this designation must make a mark-to-market election, treating all trading gains and losses as business property. This designation also exempts traders from the wash sale rule, but it involves a paper transaction where traders pretend to sell and repurchase all holdings at market prices at the end and start of each tax year.
5. Tools and Services for Traders: The article suggests utilizing specialized services like Traders Accounting, TradeLog, CryptoTrader.Tax, and TaxBit to streamline tax-related processes for day traders. These tools assist in tax preparation, entity establishment (such as LLCs), and real-time assessment of the tax impact of transactions across various exchanges.
6. Frequently Asked Questions (FAQs): The FAQs section addresses common queries, such as how day trading is taxed (short-term capital gains of 28%) and the forms used for reporting taxes from day trading (Schedule D and Form 8949).
In conclusion, the provided article offers a comprehensive overview of the tax implications for day traders, covering foundational concepts, tax designations, reporting requirements, and recommended tools and services to navigate the complexities of tax obligations successfully.
