Today we are going to talk about taxes and day trading, since we often get a lot of questions about this subject. First of all, we must clarify that we are not tax advisers, so nothing we are discussing here should be taken as tax advice. You should consult your own accountant before making any serious tax decisions when it comes to day trading. There are quite a few special rules when it comes to day trading, and many things you think might be deductible may not be unless you meet some very specific criteria, so for this reason, you should consult your tax adviser or tax lawyer to make certain you are following proper tax guidelines if you plan to trade full or part time as a day trader.
We have actually done quite a bit of research on tax consequences for day traders, and we have found that there is quite a lot of conflicting and wrong information out there, so don’t trust what you read on the Internet about this subject unless you know it’s coming from a real CPA or Tax Lawyer, and even then, I would not take action on the information until I got further confirmation from someone that I trusted unequivocally. As we stated earlier, the best course of action is to consult a certified CPA or tax lawyer for your tax questions when it comes to day trading.
What we find more often than anything from futures day traders is that they believe they only owe money on their trading profits when they withdraw them from their trading account, but this is just not accurate unless you are day trading funds in an IRA or some other tax deferred retirement account. If you make money at the end of the year while day trading, you will have tax consequences, so don’t be guilty of thinking you won’t owe taxes if you don’t withdraw profits from your trading account.
Below is an excerpt from an article we found at www.foxbusiness.com and it talks about taxes and day trading, so we thought we would share it with you. Here is what the article had to say.
Dear Tax Talk,
I am a day trader who is trading in the foreign exchange (currency) market. My plan is to day trade for five or six years to make my capital, about $1 million.
Here is my question: Assume that my initial capital is $100,000 and after one year I make another $100,000, so my capital will be $200,000.
But I do not withdraw my profit because my plan is to make $1 million. In such a case, should I pay tax on my $100,000 profit, or can I postpone it to the time that I withdraw the money from my account?
It sounds like a brilliant plan, but save some money for taxes. As a U.S. citizen or resident, gains realized on currency contracts are recognized and taxed when you close out the trade. There are no deferrals as with real estate like-kind exchanges. The only way you can defer paying taxes on your earnings is if you create a retirement plan or use individual retirement account money to day trade. You can read the rest of the information in the original post here.
If you are truly going to make it as a profitable day trader, you will be best served by hiring a qualified professional to help you with your tax returns, as understanding all of the rules and trying to do your own taxes can be very difficult for traders, and the tax laws are constantly evolving and changing year in and year out, so while you may think you are saving money by not hiring a professional to do your taxes, in the long run, you are probably costing yourself money. We learned the hard way that your tax adviser or CPA is well worth every penny that you pay him or her, and in most cases, their fee will be paid for in the savings that they afford you during tax season each year. Don’t skimp or cut corners in this area, as you do not want to end up owing penalties and interest to the IRS under any circumstances!
It’s our belief that a good accountant will actually make you money if you are truly generating a large income, so don’t be stubborn or stingy in this important financial area. After all, a visit or penalty from the IRS is not worth the small cost that is usually associated with advice from a CPA or Tax Lawyer. Remember, when it comes to taxes and day trading, there is nothing like professional assistance, and while you think this might be too expensive, you really can’t afford not to hire a professional if you are making any serious money in this business we call day trading! Learn how you can become a price action trader by checking out our information at http://priceactiontradingsystem.com/pats-price-action-trading-manual/.