Taxes For Day Traders And Investors By Richard Chapo At Isnare.com Ezine Articles

Whether you are an active day trader or just put money into the market for long term gains, taxes are something you need to address. The IRS views traders and investors differently.

As odd as it may sound, the tax code is fairly vague on the issue of taxes for day traders versus investors. Alas, the IRS has instituted a more definitive view on the subject. If you are unaware of the differences, your tax return filings could end up getting you in a hot spot.

Just so we understand what is being discussed, day traders and investors are two birds of a feather. A day trader spends their days trading stocks in short time increments. They are looking to profit from quick movements in stock. They tend to win big and lose just as big. Investors, on the other hand, tend to dump money into an account a once or twice a month. They are buying stock with the idea that it will gain value for them down the road in a few months or years.

As strange as it may sound, the IRS has looked to business to distinguish between day traders and long term stock investors. Simply put, the IRS views day traders as a small business, while those that buy or sell stock less frequently are simply stuck with Schedule D stock reporting. The difference may sound minute, but it matters from a tax point of view.

Day traders and investors are both stuck with paying taxes on their gains and dividends. Given the nature of the game, however, day traders rarely have dividend income because they do not hold on to the stock long enough. The real advantage for day traders, however, comes in the additional expense department.

Since day traders are viewed as small businesses by the IRS, they can deduct whatever any small business can. This includes expenses such as those related to home offices, internet access, stock research costs, utilities and so on. An investor cannot deduct these expenses in relation to their investment activity. In simple terms, the day trader gets to claim expenses on Schedule C, while the investor does not.

So, does this mean you should try to claim yourself as a day trader if you trade stocks more than a few times a month? Well, you have to be careful. The rule is unusually vague, even for the tax code. It states that you must trade sufficiently frequently and substantially to be considered a day trader. A better rule used by most accountants is to only claim day trader status if the activity is your only job.

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