Day Trading Taxes

Day trading taxes are anything but straightforward, but it’s important to understand them.Tax reporting means deciphering the multitude of rules and obligations.This page breaks down how tax brackets are calculated, regional differences, rules to be aware of, as well as offering tips on how to be more tax-efficient.

Note, this article does not constitute professional tax advice.Speak to an accountant for tailored guidance.

How Does Day Trading Affect Taxes?

Unfortunately, there is no such thing as tax-free trading, as day trading and taxes go hand in hand.How you’re taxed will vary hugely depending on how much you trade, and which tax system you fall under.

Tax on trading in the UK is different to that in India, Ireland, Australia and the US for example.Later in this article, you will see how taxes are estimated in different systems, but first, get your head around some of the essential tax jargon…

Tax Terminology

If trying to decipher what you owe wasn’t already complicated enough, lengthy tax documents also include a whole host of complex vocabulary.

To get your head around day trading taxes, it’s important to fully understand some general terminology.Below, we’ve defined some of the most important terms.

Earned Income

This is money you make from your job.However, some tax systems don’t consider day trading earnings to be earned income, even if it’s your full-time occupation.Whilst this may mean no self-employment tax, it also means you won’t be contributing to social security.In some countries, this will mean you’re not eligible for comprehensive retirement benefits.

Investment Income

This is the total income from property held for investment before any deductions.Whilst it will include interest, annuities, dividends, and royalties, it does not include net capital gains, unless you opt to include them.Apart from net capital gains, the majority of intraday traders will have very little investment income for the purpose of day trading taxes.

Cost Basis

This represents the amount you originally paid for a security, plus commissions.It acts as an initial figure from which gains and losses are determined.If your position’s value rises above your cost basis by the time you close your position, you have generated a capital gain.If it falls below your cost basis, you’re left with a capital loss.

Capital Gains

This is simply when you earn a profit from buying or selling a security.You’ll usually pay tax on capital gains if you held the position for less than a year.

This is normally considered a short-term capital gain and taxed at the same rate as standard income.

Capital Losses

Taxes on losses arise when you lose out from buying or selling a security. The good news is, you can often deduct those losses, up to the amount of capital gains you’ve earned this year. On top of that, one of the tax advantages of some systems is that you can actually write off an additional amount if you’ve suffered more losses and gains in one year.

One such tax example can be found in the U.S. A tax rule allows you to write off an extra $3,000 a year, and anything above that you can actually carry forward to the next tax year.

Wash-Sale Rule

If you’re day trading in the U.S, you’re likely to run into the wash-sale rule at some point. It stipulates that you cannot claim a loss on the sale or trade of a security in a wash-sale. A wash-sale is when an individual buys or sells a security at a loss, and then within thirty days before or after the sale, buys a ‘substantially identical’ security.

Differences in Financial Instruments

Whilst day trading taxes can vary, one thing that doesn’t usually make a difference, is what you’re buying and selling. Forex taxes are the same as stock and Emini taxes. Similarly, options and futures taxes will also be the same.

Tax systems aren’t concerned about whether you’re buying and selling gold, oil, or Tesco shares, they simply care about the profit and losses you’re making.

Instead, it’s the regional differences below that will have an impact.

Some types of investing are considered more speculative than others – spread betting and binary options for example. This can sometimes impact the tax position. In the UK for example, this form of speculation is tax-free. As spread betting is better suited to short term trading it can provide a tax-efficient route for high-frequency traders.

Regional Differences

Every tax system has different laws and loopholes to jump through. Day trading taxes in Canada will be different to those in Australia, Ireland, India, and the UK. This is why estimated tax rates for day trading can vary hugely, even if you’re investing in the same instruments. Having said that, the west is known for charging higher taxes.

UK

People often ask, ‘do day traders pay self-employment tax?’ The answer to that is, it depends. Tax on trading profits in the UK falls into three main categories. However, it’s worth remembering the parameters for each status change, so it’s important you check for new developments. HM Revenue & Customs (HMRC) will either see you as:

• Speculative – This is comparable to gambling activities, and if you fall under this category you’re effectively in a tax haven. You’ll be free from any and all income tax, business tax, and capital gains tax. Some investing vehicles, such as spread betting or binary options, are more likely to be considered ‘speculative’.

• The note of caution here is that while tax is not payable, it also means losses cannot be claimed as they can as a private investor.
• Self-employed trading activity – You’d be taxed the same way any normal self-employed individuals are, so you’ll be liable to pay business tax.
• Private investor – Your gains and losses will be subject to the capital gains tax regime. If you contact HMRC they will help confirm which tax status you fall under.

Tax implications in the UK aren’t severe and usually don’t deter people from dabbling in the market. As long you do your tax accounting regularly, you can stay within the parameters of the law.

US

When it comes to taxes for day trading in the US, you’ll either be a ‘trader’ or an ‘investor’. They may be used interchangeably, but your obligations will vary drastically depending on which category you fall under. They are defined as follows:

• Trader – Spends considerable time researching and executing trades (at least 16 hours a week). Also trades nearly every day the market is open and is interested in only short-term positions. Are you actually making money? Whilst bad years are allowed, most real businesses are thought to be profitable three out of the last five years. It also helps if you don’t have another job on the side.
• Investor – You are an investor if you’re not considered to be in the trade or business of buying and selling securities.

If you don’t trade regularly and you have a full-time job, you’re probably going to fall into the ‘investor’ category in terms of taxes on intraday trade profits.

• A trader can deduct their expenses, whereas, an investor’s deductions are usually extremely limited.Those deductions can add up, especially if you’re in it for the long haul.You should also look at when you have to pay your day trading taxes.Will it be quarterly or annually?

Canada

Canada’s taxes for day trading are relatively straightforward.You can either declare your profits as capital gains or as business income to the Canada Revenue Agency (CRA).Each status has very different tax implications.

• Capital gains – If you’re buying and selling securities as an investment, you probably want to use a capital account.Opt for this route and your capital gains will only be 50% taxable.However, it’s less advantageous if you incur losses.Losses can only be claimed against capital gains.
• Business income – If you’re only investing to make a profit, you may want to declare earnings as business income.

Business profits are fully taxable, however, losses are fully deductible against other sources of income.In addition, business profits are pensionable, so you may have to make contributions at the self-employed rate of 11.4%.

For full details, read our guide to Day trading taxes in Canada.

India

Day trading taxes and rules in India aren’t as complicated as it first appears.

Day traders have their own tax category, and it is important to prove that you fit within this category.

• Speculative activity – As an intraday trader, you are only involved in speculative activity if you do not hold any positions overnight. This makes you subject to speculative business income tax.
• Speculative business income – Any profits made from trading will be added or netted to other incomes, and taxed at your usual total income slab. For instance, if your salary income is Rs. 5 lakh and your daily trade profits are 2.4 lakh, your total income will be 7.4 lakh, taxed at the 10% slab according to the new tax regime.

The process of calculating taxes in India is relatively simple. However, it is recommended to seek professional advice before filing your return to stay up-to-date with any changes.

For more information, see our comprehensive guide to Day trading taxes in India.

Australia

Day traders in Australia have significant tax implications, as they are exempt from any form of capital gains tax. The Australian Tax Office considers you a trader if you engage in ‘business-like activities’ to earn income from trading.

Firstly, it is essential to determine whether you meet the business requirements:

• Income – If earning an income is your primary reason for investing, especially if you set aside specific capital for investing, you will likely meet the business requirements.
• Frequency – If you trade regularly, according to a plan and strategy, you meet these criteria.

If you trade only occasionally then you do not.

If you keep a close record of accounts and trades then you’re even more likely to meet the minimum criteria.

• Once you meet these requirements you simply pay tax on your income after any expenses, which includes any losses at your personal tax rate.

The only rule to be aware of is that any gain from short-term trades are regarded as normal taxable income, whilst losses can be claimed as tax deductions.

Tax-Free?

In the UK, CFDs, forex and spread betting are classed as ‘speculative’. As no underlying asset is actually owned, these derivatives escape Capital Gains Tax and HMRC view income derived from this speculation as tax-free. Individuals who class their activities as ‘trading for a living’ may need to pay income tax, but in general, profits are not liable for tax.

Consequences of Not Paying

Paying taxes may seem like a nightmare at the time, but failing to do so accurately can land you in very expensive hot water. The tax consequences for less forthcoming day traders can range from significant fines to even time.

In the UK for example, penalties can range from £5,000 or 6 months of jail time.

So, think twice before contemplating giving your day trading taxes a miss this year. It is not worth the ramifications.

Tips For Day Trading Taxes

The good news is, there are a number of ways to make paying taxes for day trading a walk in the park.

Below are several top tax tips:

Confirm Your Tax Status

To confirm your tax status, visit your tax system’s online guidelines and follow the instructions carefully. Then, email or write to them and request confirmation of your status. Having this confirmation can save you a lot of trouble later on.

Keep A Record

Some tax systems require you to provide every detail about each trade. To avoid guessing or leaving sections blank on your tax return, keep a detailed record throughout the year. Make sure to note the security, purchase date, cost, sales proceeds, and sale date.

Consult Your Tax Advisor

Although nobody likes paying for them, tax advisors are a necessary evil. Seek advice regularly to stay aware of any developments or changes that could impact your obligations. Doing so could save you some serious cash.

Software

As the end of the tax year approaches, you may have hundreds of trades that the taxman needs detailed accounts of. This could be a serious headache, but tax software and calculators can help. With software like Turbotax, you can transfer all the required data from your online broker into your day trader tax preparation software and be ready for the end of the tax year.

It’s a hassle-free way to keep on top of your tax obligations.

Final Word on Day Trading Taxes

Day trading and paying taxes: you cannot have one without the other. Taxes in trading remain a complex minefield. Unfortunately, they are not avoidable and the consequences of failing to meet your tax responsibilities can be severe. It’s vital, therefore, that you establish your tax status and understand your obligations. Utilising software and seeking professional advice can all help you towards becoming a tax efficient day trader.

FAQ

For Specific Countries

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