Ask the tax adviser
Day-trading tax rules
Dear Tax Talk:
I am looking at making my money by doing stock
trades exclusively. Would I only pay taxes based on capital gains,
and as an individual, what can I deduct as expenses?
I thought day trading went down the tubes with the tech boom.
I have quite a few millionaire clients that have several less million
from attempting to outsmart the swings of the market.
If you want to try your hand at day trading to make
your money, don't give up your night job and follow my tax advice.
First, day trading pretty much means that you'll buy stock one day
and sell it the same or the next. This means all your trades are
short-term and will be taxed at the same rate as other ordinary
Since short-term gains are taxed at the same rate
as other income but losses could be limited, it makes sense to make
the mark-to-market election applicable to day traders. By making
this election, your trades are reported on Form 4797 instead of
To make the election to be a trader you have to have
sufficient trading activity. In making this determination you'd
- Typical holding periods
for securities bought and sold.
- The frequency and dollar amount of your trades
during the year.
- The extent to which you pursue the activity to
produce income for a livelihood.
- The amount of time you devote to the activity.
If your trading activities are not a business, you
are considered an investor, not a trader. It does not matter whether
you call yourself a trader or a "day trader."
Interest expense and other investment expenses that
an investor would deduct on Schedule A, Itemized Deductions, are
deducted by a trader on Schedule C, Profit or Loss From Business,
if the expenses are from the trading business. Commissions and other
costs of acquiring or disposing of securities are not deductible,
but must be used to figure gain or loss. The limit on investment
interest expense, which applies to investors, does not apply to
interest paid or incurred in a trading business.
It is too late to make the mark-to-market election
for the 2003 tax year. To make the election for 2004, you must file
a statement by April 15, 2004. This statement should be attached
to either your 2003 individual income tax return or your request
for an extension of time to file that return.
The statement must include the following:
1. That you are making an election under section
475(f) of the Internal Revenue Code.
2. The first tax year for which the election is effective.
3. The trade or business for which you are making the election.
-- Posted: Sept. 5, 2003