| | | 3 Day-Trading Tax Tricks
Day traders are eligible for some valuable tax breaks. But qualifying as a day trader per IRS rules can be challenging.
Day trading stocks is a fast-paced, high-adrenaline job with huge potential rewards — and huge potential losses. It can also include some really sweet tax breaks if you qualify as a trader in the eyes of the IRS.
That’s a big “if.” Many people who buy and sell stocks on the side — that is, they have a full-time job that doesn’t involve trading — are considered “investors” by the IRS, rather than “traders.”
Ordinary investors are also eligible for some tax breaks. Most notably, if they hold investments for a year or longer, they’re eligible for long-term capital gains rates, which are lower than regular income tax rates. But investors’ tax breaks pale in comparison to those available to full-fledged day traders.
3 active trader tax breaks Because traders don’t hold on to securities for long, they don’t usually qualify for long-term capital gains rates. But if you qualify, you can receive other valuable tax benefits:
- Trading expense write-offs. Expenses related to trading are deductible as business expenses. This is potentially a much more valuable set of deductions than what ordinary investors can claim. For example, you can claim a home office for your business. Investors can deduct only investment expenses that exceed 2% of their adjusted gross income (investment expenses fall under “miscellaneous itemized deductions”).
- Deductions from losses. As a trader, each year you can use all of your losses to reduce your taxable income, assuming you made a Section 475 “mark to market” election with the IRS. You must make this election by the filing deadline for your previous year’s return. For example, if you want to elect Section 475 for the 2018 tax year, you’d have to do it by April 17, 2018. Investors can reduce their taxable income by a maximum of $3,000 worth of capital losses per year.
- Wash-sale rule exemption. The wash-sale rule is a tough one for ordinary investors, because it prohibits them from claiming a loss on a stock if they bought a “substantially identical” stock either 30 days before or 30 days after the loss sale. But active traders don’t have to worry about that rule, as long as they made the Section 475 election.
Do your research — and consider consulting a tax pro — before claiming the Section 475 election. It’s not for everyone. For example, you might be better off avoiding it if you’re focused on futures, because certain contracts qualify for a beneficial “60/40” tax rate: 60% long-term capital gains and 40% short-term gains, says Robert A. Green, a certified public accountant and CEO of GreenTraderTax.com in Ridgefield, Connecticut.
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