Day trading taxes, everyone loves talking about making big lamborghini money by trading
an hour a day anywhere in the world.
But not a lot of people talk about how to keep that money.
So you don't get the IRS coming after your ass every April.
Before we start here is a mandatory disclaimer: I am not a CPA nor a financial advisor.
I’m not licensed.
I don't know anything about taxes.
Everyone's tax situation will be vastly different.
It’s your own responsibility to ensure all your taxes are filed correctly and legally
by a professional.
I have no idea what I'm talking about.
I'm not even American.
I know what you’re thinking right now, but but humbled trader, you are Canadian you are
not even American how would you know anything about the pain of dealing with the IRS and
paying taxes here in the US.
Actually I spent a good 5 to 6 years in the US studying and working many many years ago.
So I know a thing or two about parting with my precious Benjamins every April.
And yeah, let me tell you, dealing with dual taxes with the CRA in Canada and the IRS in
the US was not fun.
I know I made a day trading taxes video for the Canadian traders last week.
But I wanna be fair to my American viewers.
They deserve their fair share of bad jokes too.
This is America!
Equality for all.
So in this video, we’ll be talking about day trading taxes in the US, what kind of
status you qualify for whether as an ordinary investor or trader tax status. and the associated
tax breaks you can utilize to save money, legally.
All these terrbile jokes, I mean day trading taxes research really took me a lot of time
to prepare.
So I’d really appreciate if you drop a like at the bottom of this video.
So when we’re looking at stock market taxes in general in the US as a regular investor
or trader, theres 2 distinct tax rates to know, long term tax rate, and short term tax
rate.
Let’s say you make $100K last year in the stock market.
And those were profits from positions you held longer than a year.
So basically not from day trades.
That capital gain would be taxed at only 15% as long term investments.
So the total taxes owed to the IRS is $15k, and your take home is $85,000.
Thats a pretty favorable tax rate.
And if the long term gains are less than $37,375 in 2019, and less than $40,000 in 2020, You
are not taxed anything at all on that income federally.
That wasnt a joek btw.
Which is like, wow, the kindest thing the IRS has ever done.
However, if we’re talking about day trading here, that usually means you buy and sell
positions often within the same day, that would be considered short term investments.
And same thing for swing trading as well, you are probably holding a position for a
few days to a few weeks.
Both day trading and swing trader profit would fall under short term investment.
Which is taxed as your ordinary income.
So that same 100K capital gain would be taxed at your income bracket at 24%.
You would owe the IRS $24,000, and the take home is only $76K.
This is why it’s so important to keep your long term investment account and your short
term day trading or swing trading accounts separate, for accounting purposes.
You dont want to have to deal with a nightmare trying to figure out which investment profits
are from long term and short term each spring.
Of course, for both the short term and long term investment examples are with federal
tax only, you’ll have to factor in the state tax you’re in yourself.
Thats the basic summary of what kind of taxes you’ll have to pay if you are a short term
trader that falls under the ordinary investor status.
So if you’re a part time trader trading on the side while working a full time job,
beginner trader with a small account, and really 90% of day traders out there fall under
this investor status category under the eyes of the IRS.
But, as ordinary investor status, which is 90% of day traders out there, you are allowed
limited tax breaks.
Yes, You can claim your losses to offset your gains.
This works for both long term and short term capital losses against the gains.
This is if you are net positive on the year.
Now, what if you had a terrible year in the market overall, and you ended the year net
negative.
for both investing and day trading.
You can deduct up to $3,000 of your losses against your income.
Yes you heard that right, only $3000.
So if you’re chasing that penny stock break out this week and made $1000, but next week
you do the same and lose $5000.
You can only claim $3000 out of that $4,000 loss.
And this is for the entire year, you can only claim $3,000 loss against your income.
Thats like, not even enough to afford that $5000 DVD.
Any losses over $3,000, its just a straight loss, its gone, that lamborghini money is
washed down the drain.
Just kidding, you can carry over that excess capital loss credit into the next 8 consecutive
years.
Which is better than Canada, Canadian investors can only carry our losses over for 3 years,
but we don't have a max $3000 cap, we just have better jokes.
That 8 year carry over period for capital loss in the US, sounds nice in theory, but
again, each year, you can only use up to $3000 to offset your income each year.
For long term investors with profits from over 1 year holding period, thats still not
terrible since they have very favorable tax rate compare to ordinary income, but for most
day traders and swing traders who are considered short term investors, thats not ideal at all.
So maybe think twice before chasing those chat room alerts.
Just saying, you know.
As day traders, the only efficient way to optimize your day trading income and losses
and pay less tax overall, is if you remember to smash the like button.
Theres a new IRS tax reform change in Section 123BS that allows you to pay less taxes if
you tapped that like button.
Seriously, remember to talk to your CPA about it, it’ll save you a lot of Benjamins.
Ok just kidding but not really, as day traders in the US, the only efficient way to optimize
your day trading income and losses is if you qualify for the Trader Tax status, which we’ll
cover in just a little bit.
Another thing to be aware of if you’re filing as an investor status, is the wash sale rule.
Which means that if you sell a stock for a loss both as a short term or long term investment,
you cannot claim that capital loss, if you hold the same position 30 days before or 30
days after the loss sale.
Which is an extremely tough restriction, especially for day traders filing under the investor
status.
This rule can easily turn your tax filing season into a nightmare.
So make sure to talk to a certified tax professional when filing your taxes.
Again, this is just a summary of what I know regarding day trading taxes in the US.
talk to a CPA, it’ll make your life so much easier.
Im sure you know by now, filing as an investor status for your short term day trading or
swing trading income really sucks.
But what if you file as a TTS trader, Trader Tax status designated trader?
Spoilers, you get a lot better tax breaks, but the trader tax status is a lot harder
to qualify which we will go over in a little bit.
The biggest advantage to filing with a trader tax status is that you can deduct more than
just the $3000 loss normal investor status tax filers have.
As a hyper active day trader, each year you can claim all of your losses in the market
against your total income.
To do so you must make a “mark-to market” election in Section 475 with the IRS by the
tax filing deadline for the previous year.
So if you want to make that mark to market election for the 2020 tax year, then you must
have that selection made by April 15, 2020 when you are filing for your 2019 tax return.
But again, thats only if you qualify for the TTS designation.
Another benefit of filing with TTS is that you are not bound by the wash sale rule we
talked about earlier, since you qualify for mark to market accounting, which allows you
to claim all your losses.
But you must “pretend to sell all of your holdings on the last day of the year for tax
purposes, and pretend to purchase them again in the new year.
This is just for accounting purpose, again, talk to your CPA about the specific details
and your own tax situation.
One more extremely generous tax break that TTS designated traders have is the ability
to write off trading expenses.
Almost anything you pay for in order to trade and make money with your trading business
is considered tax deductible.
That means you can claim your scanners, news wires, computers, chat rooms, that $5000 DVD,
internet bills, as well as part of your rent or mortgage if you work from home.
This is once again, far superior than if you were filing ordinary income as a short term
investor.
Because of the TCJA, Tax Cuts and Jobs Act of 2017, what you can write off as expenses
against your capital gains has been extremely limited.
Now, how exactly do you qualify for this amazing trader tax status?
There is actually no IRS statue or regulation.
But here are some very general rules to see if you qualify for that status in the eyes
of IRS.
You should be spending 30 hours or more on trading or trading related activities, and
average about 4 or 5 day trader per day for most of the tax year.
So if you are trading part time 1 or 2 hours before work each day, you don't qualify for
TTS.
Your average holding period should be less than 31 days, this should be an easy one for
most day traders.
You should be treating trading as a business with the necessary software, research tools,
and a significant trading account.
If you are using subpar or free tools, nothing wrong with that, but im just saying, in the
eyes of the IRS, you are not taking trading seriously enough as a primary business.
And also if you are trading with a small account of $2000 or $5000, thats not a significant
enough amount for you to qualify for TTS designation.
Yes we all know that getting the Trader Tax status is the most tax efficient way to file
your trading income, but its harder to qualify.
When I was working in the US and trading part time, I didn't qualify for TTS either.
This TTS designation is never guaranteed.
A trader can qualify for TTS one year but not the next, or only qualify for part of
the year.
if you do not meet the general requirements I just talked about in the eyes of the IRS.
There are other ways to qualify, such as forming an LLC or a C corp.
But please do your own research and talk to a CPA on that part.
Again, Im just a Canadian chilling up north sipping my maple syrup, and counting my much
more beautiful looking, but way less valuable dollar bills.
Im making this video for the bad jokes, I dont know what im talking about.
If you want to learn more details about the trader tax designation and how to save money
filing your day trading taxes, ill leave a few website resources in the description.
Also feel free to check out my friend, fellow trading YouTuber Zip Trader Charlie.
Hes done a few videos on day trading taxes in the US that go into even more details.
And remember to drop ravishing comments and tell him that humbled trader’s bad jokes
are much better than his.