The serious day trader, who buys and sells stocks, options, futures, and currencies multiple times daily, must keep a close eye on taxes.
While day trading may result in attractive profits, it also carries with it an additional burden of tax consequences. As a result, many day traders look to expert tax advice and strategies regarding these tax issues.
Here Are Four Tax Ideas For Serious Day Traders
This post provides comprehensive yet straightforward tax tips for serious day traders.
1. Keeping Up-To-Date On Tax Law Changes
The landscape of tax rules and regulations can change significantly over the course of a single year. Keeping track of tax changes is challenging, especially when they involve the complexities of day trading. Day traders must stay abreast of the latest tax laws, deductions, rules, and regulations.
Day traders should also consider hiring a tax specialist to stay ahead of the curve. It is wise to be proactive by researching the tax implications of specific transactions before executing them rather than dealing with hassles and headaches afterward.
2. Calculating Your Net Trading Gains/Losses
When tracking and organizing day trading transactions, keeping accurate and organized records is critical. This ensures you better understand your profits and losses when filing your taxes. It is important to remember that the Internal Revenue Service (IRS) requires a special form to be used when preparing taxes for day traders.
Form 8949 must list each sale of securities separately with the associated profit or loss. It is also important to ensure that all necessary forms, such as brokerage statements and 1099s, are included when filing taxes.
According to calculating gains and losses day traders, according to IndependentInvestor, must also be aware of wash sale rules when calculating gains and losses. A wash sale occurs when securities are sold at a loss and then repurchased within 30 days from the date of sale. This is seen as an attempt to artificially reduce hundreds of days of trading profits into one “tax loss.”
Unfortunately, for day traders, wash sale rules dictate that losses may not be claimed on Form 8949. As a result, day traders should track the purchased stocks carefully and plan out trades to ensure wash sale rules are not violated.
3. Maximizing All Possible Tax Deductions
In addition to understanding personal tax regulations and laws, it is important to be aware of available tax-related deductions to maximize your potential tax savings. Many day traders may be aware of ordinary deductions such as standard business expenses like office space, equipment, and software. While these are indeed deductions, a few additional deductions could be taken advantage of.
For example, home office deductions are allowed for day traders in certain situations if the office is used exclusively and regularly for the purpose of business. This deduction can result in significant tax savings of up to $1,500 or more in some cases. Other deductions such as online educational programs, business-related subscriptions, tuition, and other membership fees may also be allowed.
4. Limiting Your Tax Liability With Long-Term Planning
Long-term planning when it comes to taxes is of critical importance to all-day traders. Developing and implementing ongoing strategies related to taxes reduces potential liabilities over time. The most beneficial long-term planning tool available to day traders is retirement planning.
Retirement plans such as SEP, Simple IRA, and 401(k) are designed to minimize taxes due to their compounded effect over the long term. The benefits of ever-increasing tax-deferred growth can produce significant returns once the individual reaches retirement.
Likewise, deferring income can also help minimize taxes for day traders over the long term. As long as profits are reinvested back into trading, interest on gains is not taxed until the funds are withdrawn. Similarly, investing in stocks and ETFs in a tax-advantaged account such as an IRA or 401(k) can reduce taxable income as only dividends, capital gains, and distributions are taxed.
And lastly, making charitable gifts is also a helpful and tax-advantaged method for long-term tax planning in day trading. Proper use of a Donor-advised fund can help limit taxes by setting aside amounts for the current year yet receiving the benefit of deductions for the following year.
Since cash distributions to charitable organizations are immediate, money is able to grow and mature earlier and can be donated for the current tax year.