How to Reduce Your Day Trading Tax?
Though Day Trading is inherently risky, as a Day Trader you can become consistently profitable, if you deploy an ironclad risk management and have elaborated your own Intraday Trading strategy exercising high degree of self-discipline and objectivity. However no matter you win or lose, you'll need to report your trades on your Tax return, and pay Taxes on the profit you realize.For a lucrative Day Trader Tax Payments are typically far less than your regular income, and good news is as an Intraday Trader, you are eligible for tax benefits. Any profit made from Day Trading is income that you have to pay tax on. When it comes to tax obligations in the U.S. you need to consider long-term versus short-term capital gains. Capital gains Tax as its name implies is paid on capital gains, unlike income tax, whereas its rate is generally lower than standard income (0% to 20%) based on your income.
HOW TO SAVE ON TAX
» The difference between short-term and long-term gains affects how the Internal Revenue Service regards your capital gains. If you purchase and hold a stock for at least a year, it is Taxed as long-term capital gains.
» If you are a short-term investors i.e. a Day Trader and buy a stock then sell it within a year for profit, you'll need to pay short-term capital gains Tax, and your profit will be added to your yearly income as well as taxed at the same rate as your regular income, depending on your Tax bracket (10% to 37%).
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1. The Mark-To-Market Method is to offset capital gains with capital losses. You can get a tax deduction for your losses on trades up to $3000 only, and reduce capital gains tax, however if you qualify as a trader by IRS criteria, you can register for an election to mark-to-market (MTM) your stocks that would allow you to mark the value of your stocks to the new market value at every 1st of January to reset any gains or losses to $0. Though you cannot bring forward losses into the following year, typically most Day Traders can benefit from this Day Trading Tax Saving Strategy.
2. Wash-Sale Exemption is when a Day Trader sells off losing stocks to offset gains. Due to this widely prevalent Tax Saving technique embraced by the vast-majority of Intraday Traders, as IRS mandates it, you cannot sell an investment at a loss and buy it again within 30 days. With the wash-sale exemption, you can offset gains by selling off stocks.
PLAN YOUR TAX
4. To hire an expert financial advisor who is proficient in Day Trading Tax Reduction is a wise idea, and more often than not such person can max out your Day Trading Tax savings by considering the best practices for your specific tax environment and determining what steps you should make.
5. A very complex but undeniably the most advantageous Intraday Trading Tax Saving strategy for those Day Traders that make considerable profit from Day Trades on regular basis is, if you legally transfer your Day Trading business to a Tax-Friendly jurisdiction without dealing with the controversial term of offshore. Despite of its cumbersome process and relatively high costs, if you are flirting with paying your Day Trading Taxes at the fraction of the US rates or rates in your country if you are a non-US stock trader, to change your Tax residence is a viable option. With a traceably reliable company located in the underlying country of your preferred jurisdiction, formalities can be completed in less than 30 days without major grueling paperwork but obviously your presence is required for a few days.
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