Day trading can be a lucrative side job or a successful full-time job if you have the right tools and training. But most beginners wonder if they have to pay taxes on the profits from trading and, if yes, how to calculate them. Day trading income is subject to taxes, as you have to report all your gains and losses to the IRS during tax season. This guide looks at how to calculate taxes and the best ways to save on your taxes.
Taxes on Day Trading
If you’re trading from a non-taxable account, day trading is subject to capital gains taxes. This is the same with every form of trading, even if you’re day trading stocks, options contracts, or ETFs. You will be subject to short-term capital gains taxes because day trading is taxed as employment instead of asset appreciation.
With online trading, you’re expected to make a profit each day. Compared to a long-term investor who buys to hold, day traders make many trades, which offer opportunities for a much bigger profit. Day trading is taxed similarly to swing or scalp trading because these traders buy and sell the same assets within a year.
Short-term capital gains have higher taxes than long-term gains because the former is treated as income while the latter is seen as asset appreciation. If you’re going into day trading, consider whether the short-term taxes are worth it. Here’s a table to illustrate the long-term and short-term capital gains taxes.
| Gross Annual Income | Long-Term Tax Rate | Short-term Tax Rate |
| Up to $9,325 | 0% | 10% |
| $9,326 to $37,950 | 0% | 15% |
| $37,951 to $91,900 | 15% | 25% |
| $91,901 to $191,650 | 15% | 28% |
| $191,651 to $416,700 | 15% | 33% |
| $416,701 to $418,400 | 15% | 35% |
| $418,401 or more | 20% | 39.6% |
How Is Day Trading Income Calculated?
Day trading is calculated as short-term gains and is taxed at the same rate as other income. The tax rate depends on your marginal tax rate. It ranges from 10% to 37% of profits, so even if you’re very successful at day trading, you should remember that you have to pay taxes afterward.
Since day trading is taxed at the same rate as employment income, you pay based on your income level and how you file: married, filing separately, or head of household. You can always join a day trading community for more advise from other day traders and hear their experiences.
For traders in the United States, it’s important to note that the taxes depend on where you live. Some states have no capital gains taxes, including Texas, Alaska, Nevada, South Dakota, Wyoming, Florida, New Hampshire, Tennessee, and Washington. However, other states have very high capital gains taxes that would eat out your profit. These include California, New Jersey, Minnesota, New York, Wisconsin, Hawaii, Oregon, Vermont, Iowa, and Maine.
If you’re looking for tax havens outside of the USA, Dubai is a popular destination because it does not have personal income taxes. You won’t have to pay taxes on your day trading gains. Other similar countries include Switzerland, the Cayman Islands, and Puerto Rico.
Canada has taxes similar to those of the United States. Meanwhile, Singapore has no taxes on capital gains, but a higher frequency may require capital gains taxes.
Day traders must track their trades, whether gains or losses, and calculate their tax liabilities. This meticulousness will help them avoid legal issues.
Ways To Save on Day Trading Taxes
Day traders can also use tax benefits and deductibles to reduce their taxes. When calculating your day trading taxes, you can deduct the short-term capital losses from the gains, allowing you to lower your taxes. However, you can only deduct $3000 per year. If you’re married and filing separately, you can only deduct $1500 each.
Another way to save on your taxes is to qualify for trader tax status. The IRS will reduce your taxes if you qualify as a day trader. The criteria include:
- Gain profits from daily market movements of securities, not dividends, interests, or capital appreciation.
- Take part in significant trading activity.
- Carry out trading regularly.
You don’t qualify as a day trader if you hold securities for long-term benefits. To meet the criteria, you must make multiple trades daily, hold securities for a short period, and have substantial funds for trading.
You can also save on your day trading taxes with the mark-to-market method. Usually, your limit is $3,000 for losses. Despite this, if you qualify as a day trader under the IRS, you can file an election to mark-to-market the securities. This will mark the value of the security to the market value at the start of the year. So, it resets your losses and gains to $0.
Another method is to sell the losing assets to offset gains. According to the IRS, if you sell an investment at a loss, you cannot repurchase it within 30 days. Finally, you can deduct qualified business expenses like trading platforms, trading apps, software, tools, internet, and smartphones. The costs of your home office or education can be deducted.
Optimizing Savings and Compliance as a Day Trader
Before you get into day trading, remember the taxes, as a significant amount would be deducted from your earnings. Ensure you keep your trading data organized to prevent mistakes during tax season. Also, don’t hesitate to take advantage of tax deductions whenever you can.
