taxes

How to day trade your way around taxes

George SaenzDear Tax Talk,
I am a day trader who is trading in the foreign exchange (currency) market. My plan is to day trade for five or six years to make my capital, about $1 million.

Here is my question: Assume that my initial capital is $100,000 and after one year I make another $100,000, so my capital will be $200,000.

But I do not withdraw my profit because my plan is to make $1 million. In such a case, should I pay tax on my $100,000 profit, or can I postpone it to the time that I withdraw the money from my account?

Best regards,
-- Kaveh

Dear Kaveh,
It sounds like a brilliant plan, but save some money for taxes. As a U.S. citizen or resident, gains realized on currency contracts are recognized and taxed when you close out the trade. There are no deferrals as with real estate like-kind exchanges. The only way you can defer paying taxes on your earnings is if you create a retirement plan or use individual retirement account money to day trade.

If you have the required capital in an IRA, or better yet a Roth IRA, you could set up a self-directed IRA that would allow you to day trade. I suggest a self-directed account, as many traditional IRA custodians probably would not permit a day-traded IRA. For more information, check out Bankrate's article, "Self-directed IRA a good bet?"

If your plan is to do this over the next several years, you might want to consider whether it is possible to create a retirement plan with your business in order to shelter some of the gains. You also might want to get some advice from a certified public accountant on this planning strategy.

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