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How do I Calculate Taxes on Day Trading?

By A. Rohlandt
Updated: May 16, 2024

The amount of payable taxes on day trading will depend on a few factors. If you are US based the most important factors will be your trading status and the capital gains rate applied to your trades. You may be classified as either a trader or an investor, and both have certain advantages and disadvantages. It is important to remember that tax rules and guidelines will differ depending on the country you reside in.

There are two capital gains rates in the US that can affect taxes on day trading: the long-term capital gains rate and the short-term capital gains rate. If a stock is held for less than 12 months, and makes a profit when sold, it is taxed at the short-term capital gains rate. When a stock is held for more than 12 consecutive months and then sold at a profit, the long-term capital gains rate should be used when calculating taxes.

The short-term capital gains rate in the US in 2009 was set at 35% regardless of the individual's tax bracket. The long-term capital gains rate for the same year ranged between 0% and 15% depending on the individual's annual income. Long term trades means lower tax rates, but if you are a day trader you most likely fall under the short term rate for most of your trades.

Your trading status will also affect the amount of payable taxes on day trading. If you are classified as an investor, cannot fully deduct all the expenses incurred during trading, but if you are classified as a trader you can deduct most of your costs. There are no set rules on what qualifies someone as either an investor or trader, but applying the guidelines laid out by the US courts should be helpful in understanding your status.

The courts consider you to be a trader if you spend a lot of time trading, and if your trades account for a significant portion of your annual income. You can probably trade part time and still be considered a trader, but you should trade on a daily basis. A trader also aims to profit from short term changes in the market and by making multiple trades on a daily basis rather than focusing on long term investment.

Keep separate trading accounts for long term and short term trades, because this will make it easier to calculate your taxes on day trading. There are software solutions that can download the necessary data from the broker platform and transfer it into your tax software.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
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