Day trading and capital gain tax nightmare

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fer123
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Day trading and capital gain tax nightmare

Post by fer123 »

Hey guys, I got into day trading lately and I enjoy it a lot.
However, this tax thing is stressing me out a lot.

My tax bracket is at 25%.
I was under the impression that I'll be paying 25% tax on my overall income for the year, but now that I'm hearing it's not on my overall income, it's based on my individual stock.

So let's say I bought/sold a stock within 3 days. Earned 5% income.
Next stock I bought/sold, I lost 5%.
Next stock, I gained another 5%.

So overall, gained 10%, lost 5%.

What will happen now? Do I pay 10% income tax or 5%?
If it's the first one, how the heck is anyone ever supposed to win this?
You can only gain back 3k of your losses but if your investing and risking around 100k, it doesn't mean much at all.

What are my options here? I really enjoy day trading and don't want to look into long term investments, what can I do?
livesoft
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Re: Day trading and capital gain tax nightmare

Post by livesoft »

Your only option is to understand taxes. There are no shortcuts such as getting help from an anonymous internet forum. Start by reading this: http://www.irs.gov/pub/irs-pdf/p550.pdf

There is more to it than that, but it's a start.
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Leesbro63
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Re: Day trading and capital gain tax nightmare

Post by Leesbro63 »

This is sort of like asking a preacher for advice on smoking and gambling. But the honest short answer is you need to consult with a tax advisor and read up on taxation of short term capital gains of securities sales
lack_ey
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Re: Day trading and capital gain tax nightmare

Post by lack_ey »

In short, oversimplified, net (short-term) capital gains get taxed as ordinary income so at your marginal rate. The losses from sales are subtracted from the gains from sales (with no wash sales where you rebuy the same thing within 30 days).
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fer123
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Re: Day trading and capital gain tax nightmare

Post by fer123 »

So overly-over simplified:

I gain $1000 on stock1.
I lose $1000 on stock2.
I gain $1000 on stock3.

If I don't buy stock2 again within 30 days.
I'll pay $1000 ($2000 income - $1000 loss) - 25% as tax?
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nisiprius
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Re: Day trading and capital gain tax nightmare

Post by nisiprius »

I think you will have to do math and make an individual line entry for every completed buy-then-sell transaction you made. Whatever you do, you will need to begin by digging out a complete record of every purchase and sale you made in 2014, with the amount and the date. You need to have that ready before you decide whether to tackle it yourself or go to a tax prep service.
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ResearchMed
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Re: Day trading and capital gain tax nightmare

Post by ResearchMed »

The $3,000 loss deductible "limit" is only for losses that can be deducted from "regular income".

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CABob
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Re: Day trading and capital gain tax nightmare

Post by CABob »

Wow, where to start?
So let's say I bought/sold a stock within 3 days. Earned 5% income.
Next stock I bought/sold, I lost 5%.
Next stock, I gained another 5%.
First of all, I think you would be better served by looking at your transactions in dollars rather than percentages. I'm assuming that the three 5% figures probably don't apply to the same dollar figures so it is impossible to really address the circumstance.
My tax bracket is at 25%.
I was under the impression that I'll be paying 25% tax on my overall income for the year
By tax bracket I assume that means your last dollar of income is taxed at 25%. This does not mean that all of your income is taxed at 25%.
I suggest you learn about income taxes, perhaps by reading, perhaps by actually doing your taxes. http://www.irs.gov has a lot of information that you should know. Look for titles having to do with investing, capital gains, etc.
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Dale_G
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Re: Day trading and capital gain tax nightmare

Post by Dale_G »

You should be able use a tax preparation program such as TurboTax to download all of the required information from your brokerage account. That will make things a whole lot easier.

Basically you will pay a 25% tax on your net short term gains.

Day trading may be fun for you, but you are unlikely to make much money at it.

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adamthesmythe
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Re: Day trading and capital gain tax nightmare

Post by adamthesmythe »

> I think you will have to do math and make an individual line entry for every completed buy-then-sell transaction you made.

Well I have just learned another good reason not to go in for day trading.

Look at it this way- if you gain big you can afford to pay the taxes and the accountant. If you lose big you will have learned enough about taxes for a new career as a tax preparer.
bhsince87
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Re: Day trading and capital gain tax nightmare

Post by bhsince87 »

There are many ways to look at it. To me, it sounds like this is your situation:

Bought, say, 100k of one stock, Lost 5%. Now you have 95k.

Used that to buy another stock, gained 5%. Now you have 99.75k.

Bought another stock with that, and lost 5%. Now you have 94.76k.

So net, you've lost $5,240, plus commissions.

Your're right, you can't win at that game!


But you can at least deduct $3,000 of that this years against other regular income (hopefully, you'll have some). The other $2,240 loss can be carried over to future years.

Now assuming you somehow made a profit of $5,000 (after commissions),since its a short term gain, it would be taxed at your marginal 25%, so your net profit would be $3750. If you held the winner for at least a year before you sell it, the tax rate would drop to 15%, so your net profit would be $4250.

Day trading might be fun, but record keeping and tax planning aren't.
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niceguy7376
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Re: Day trading and capital gain tax nightmare

Post by niceguy7376 »

OP,
I am curious as to what your search criteria on the web was to reach this forum for this topic.
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fer123
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Re: Day trading and capital gain tax nightmare

Post by fer123 »

bhsince87 wrote:There are many ways to look at it. To me, it sounds like this is your situation:

Bought, say, 100k of one stock, Lost 5%. Now you have 95k.

Used that to buy another stock, gained 5%. Now you have 99.75k.

Bought another stock with that, and lost 5%. Now you have 94.76k.

So net, you've lost $5,240, plus commissions.

Your're right, you can't win at that game!


But you can at least deduct $3,000 of that this years against other regular income (hopefully, you'll have some). The other $2,240 loss can be carried over to future years.

Now assuming you somehow made a profit of $5,000 (after commissions),since its a short term gain, it would be taxed at your marginal 25%, so your net profit would be $3750. If you held the winner for at least a year before you sell it, the tax rate would drop to 15%, so your net profit would be $4250.

Day trading might be fun, but record keeping and tax planning aren't.

okay then,
stock1 at 100k, win 5% = 105k
stock2, lose 5% = 99.75k
stock3. win 5% = 104.73k

net income 4.73k.

I'll be paying 25% of 4.73k as my tax?
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Taylor Larimore
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Re: Day trading and capital gain tax nightmare

Post by Taylor Larimore »

Fer123:

Welcome to the Bogleheads Forum!
Hey guys, I got into day trading lately and I enjoy it a lot.
However, this tax thing is stressing me out a lot.
You are speculating; not investing. You are discovering just one of the benefits of stay-the-course vs. day trading.

There is another problem with day trading (gambling): "77% of American Day Traders Are Losers."

Day-Traders Lose Big

I respectfully suggest you learn how to invest successfully the Boglehead way: Getting Started

Best wishes.
Taylor
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barnaclebob
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Re: Day trading and capital gain tax nightmare

Post by barnaclebob »

fer123 wrote: okay then,
stock1 at 100k, win 5% = 105k
stock2, lose 5% = 99.75k
stock3. win 5% = 104.73k

net income 4.73k.

I'll be paying 25% of 4.73k as my tax?
The fact that you are day trading without knowing the rules is a huge red flag to your ability to generate excess returns.

Assuming this is your only capital gains and losses and that you are at least 4.73k into the 25% tax bracket and don't have any previous capital loss carryovers and you don't have any mutual funds that have distributed capital gains, and you have accounted for wash sale rules and if i'm not forgetting anything else, then yes.

Short term trading is an automatic 10% hit to your gains due to taxes btw. If a mutual fund gains 10% you'd have to gain 11 +fees to "break even" if you would be holding that mutual fund over the long term.
Last edited by barnaclebob on Thu Feb 12, 2015 12:33 pm, edited 2 times in total.
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baw703916
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Re: Day trading and capital gain tax nightmare

Post by baw703916 »

Taylor Larimore wrote: There is another problem with day trading (gambling): "77% of American Day Traders Are Losers."
This does at least eliminate the problem of capital gains taxes. :)
Most of my posts assume no behavioral errors.
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zaboomafoozarg
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Re: Day trading and capital gain tax nightmare

Post by zaboomafoozarg »

fer123 wrote:okay then,
stock1 at 100k, win 5% = 105k
stock2, lose 5% = 99.75k
stock3. win 5% = 104.73k

net income 4.73k.

I'll be paying 25% of 4.73k as my tax?
If stock1, stock2 and stock3 are all different stocks held for less than 1 year, then yes.

But if stock2 is the same as stock1 or stock3 and you sold stock2 31 days before or after buying stock1 or stock3, then you won't be able to deduct part or all of the stock2 loss from your capital gains.

So it's really important to understand wash sales.
john94549
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Re: Day trading and capital gain tax nightmare

Post by john94549 »

OP: if you enjoy day-trading, I would offer a few suggestions: (a) open a brokerage account with tax-deferred funds (such as an IRA), as you can ditch the record-keeping; (b) obtain transaction costs (i.e., commissions) as low as possible (free trades are best); and (c) limit your gambling to money you can afford to lose, as you just well might.

When I trade (which is seldom), I use my SEP-IRA at Schwab. While your account does reflect gains and losses in each position, it's academic. As the seed money was all tax-deferred, all (eventual) withdrawals will be taxed as ordinary income.
Last edited by john94549 on Thu Feb 12, 2015 12:44 pm, edited 1 time in total.
investor
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Re: Day trading and capital gain tax nightmare

Post by investor »

do all the day trading in an IRA account.

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livesoft
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Re: Day trading and capital gain tax nightmare

Post by livesoft »

Don't day trade in an IRA account because one cannot fill it up as easily after it loses money since there are annual contributions limits. And one cannot get other taxpayers to pay for your losses either.
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Lynette
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Re: Day trading and capital gain tax nightmare

Post by Lynette »

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powermega
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Re: Day trading and capital gain tax nightmare

Post by powermega »

Welcome to the board fer123.

If you're going to do the day trade thing, then I really hope the money you use for that is "play money" that you can afford to lose, and that your retirement investing is the kind of long-term investing that you should be doing. If you're going to be a day trader, you really need to understand the mechanics of capital gains taxation. If you don't want to learn about capital gains taxation, then do your day trading in a qualified investment account (I'm putting aside the idea that this really goes against the grain of wisdom for how to build wealth for retirement).

Good luck with your day trading. I really do hope you're successful, but highly doubt that you will be.
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Toons
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Re: Day trading and capital gain tax nightmare

Post by Toons »

Hire an accountant or purchase Quicken to track buys sells,cap gains and losses :happy
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Re: Day trading and capital gain tax nightmare

Post by kolea »

nisiprius wrote:I think you will have to do math and make an individual line entry for every completed buy-then-sell transaction you made. Whatever you do, you will need to begin by digging out a complete record of every purchase and sale you made in 2014, with the amount and the date. You need to have that ready before you decide whether to tackle it yourself or go to a tax prep service.
I went through this, not as a day trader, but I had an FA managing some money for us while I was too busy with work. He was a very active trader and we averaged around 100 trades per year, some short, some long.

It was actually not as bad as I thought - the IRS allows you to just attach the cap-gains/loss details from your broker as long as it has all the information that schedule-D requires, in tabular form. The gain/loss report from the broker summed up short term and long term net gain/loss. So it was really only a matter of copying those figures to our Schedule D and attaching the gain/loss report from the broker, and filing that with the IRS.

The first year of this I was intimidated and went to a CPA to file and all she did is what I described. So after that I just did it.
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lack_ey
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Re: Day trading and capital gain tax nightmare

Post by lack_ey »

Anyway, TurboTax, H&R Block, etc. should be able to download all your transactions from your brokerage and do all the calculations for you. If not, you're going to be very sad one day going through the cost basis of each transaction manually. Or apparently you can just attach the form from the brokerage when filing.
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Re: Day trading and capital gain tax nightmare

Post by baw703916 »

livesoft wrote:Don't day trade in an IRA account because one cannot fill it up as easily after it loses money since there are annual contributions limits. And one cannot get other taxpayers to pay for your losses either.
Don't lose money.
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red5
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Re: Day trading and capital gain tax nightmare

Post by red5 »

fer123 wrote:What are my options here? I really enjoy day trading and don't want to look into long term investments, what can I do?
I once took advantage of 50 free trades in a taxable brokerage account before my index investing days. It was a rush executing all those trades. Most of my positions lasted less than a day. After my 50 trades I had gained about $5.00.

I had about 4 wash sales. Three of them were completely closed out within that tax year and one I had to carry the adjusted cost basis forward a year.

Although I was able to import my tax information into my tax software it was still a royal pain going through the records to ensure everything was correct.

Then in October I received a corrected tax form due to a wash sale.

What did I learn? To invest in index funds and to more thoroughly understand how taxes work.

So that is what I would do if I were you, learn about wash sales, long term gains, short term gains, etc (which actually one should do anyways, even if just passively investing).

Sorry that is not really answering your question, some of the previous posters did. I just wanted to share my own experience.
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swimirvine
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Re: Day trading and capital gain tax nightmare

Post by swimirvine »

Leesbro63 wrote:This is sort of like asking a preacher for advice on smoking and gambling. But the honest short answer is you need to consult with a tax advisor and read up on taxation of short term capital gains of securities sales
+1
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inbox788
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Re: Day trading and capital gain tax nightmare

Post by inbox788 »

REAL day traders don't have to worry about wash sales. Pure day traders don't take overnight risk, so they're always in cash at the end of the day and year.

As far as capital gains taxes, it's VERY simple. Take difference in cash at beginning of year and end of year and pay STCG or claim STCL.

Disclaimer: Not legal, tax or accounting advice. BTW, not unlike http://www.irs.gov/taxtopics/tc419.html.
investor
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Re: Day trading and capital gain tax nightmare

Post by investor »

livesoft wrote:Don't day trade in an IRA account because one cannot fill it up as easily after it loses money since there are annual contributions limits. And one cannot get other taxpayers to pay for your losses either.

Was really talking about money already in an IRA.

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john94549
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Re: Day trading and capital gain tax nightmare

Post by john94549 »

investor wrote:
livesoft wrote:Don't day trade in an IRA account because one cannot fill it up as easily after it loses money since there are annual contributions limits. And one cannot get other taxpayers to pay for your losses either.

Was really talking about money already in an IRA.

investor
I read "livesoft"'s comment as being more than a bit tongue-in-cheek. I think I got the joke.
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Re: Day trading and capital gain tax nightmare

Post by Tanelorn »

inbox788 wrote:REAL day traders don't have to worry about wash sales. Pure day traders don't take overnight risk, so they're always in cash at the end of the day and year.
Being in cash at the end of each day or year doesn't preclude wash sales. Real day traders don't have wash sales because there aren't wash sales on trading profits, only trading losses ;).
spectec
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Re: Day trading and capital gain tax nightmare

Post by spectec »

It is possible to make a small fortune day trading in 3 easy steps.

1) Start with a large fortune
2) Begin trading
3) Stop trading when you get to a small fortune.
Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it. - Will Rogers
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parsi1
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Re: Day trading and capital gain tax nightmare

Post by parsi1 »

Turbotax will do it all for you. All you need to do is to log into your brokerage account when you are prompted in turbotax.
Well that's what I think, I haven't traded stocks for 15 years and I have never day traded.
Barrymer
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Re: Day trading and capital gain tax nightmare

Post by Barrymer »

If you do all your trades through one broker, shouldn't they be able to provide end of year data you could simply give to your accountant whereby he could sort the entire mess out? Or is that just naive?

Also, don't the same tax issues apply to any stock that is held less than a year, not just day trades? Of course the tax issues would be magnified with day trading simply because of the volume of trades. Is that correct?

I'm exploring the idea of doing some selective medium term stock trading but I find this thread extremely daunting.
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Re: Day trading and capital gain tax nightmare

Post by Awsi Dooger »

Bizarre thread. I expect the fear-based and mocking replies around here, to a topic like this. That's the default.

But an actual gambler or day trader is already well aware of the math and the variables, and proceeds accordingly.

As long as we're ripping day traders, I'll take a pot shot at one of the dependable themes here. It always strikes me as hilarious. The theme is not to pay attention to the market, to merely allow the long term logical index fund path to enable gains. Yet for all the focus elsewhere, there's certainly a glee to report that it's swell to be heavy in bonds, during the stretches that the market is tanking. Nobody pays attention, except apparently during those downturns. Of course, those threads have been absent the past few days. But they'll show again. :mrgreen:
spectec
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Re: Day trading and capital gain tax nightmare

Post by spectec »

My response isn't fear-based, it is experience-based. I've prepared enough tax returns for day traders to detect a pattern, and it's very precitable & very ugly. Or maybe I just attract unlucky clients.
Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it. - Will Rogers
Xpe
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Re: Day trading and capital gain tax nightmare

Post by Xpe »

Awsi Dooger wrote:Bizarre thread. I expect the fear-based and mocking replies around here, to a topic like this. That's the default.

But an actual gambler or day trader is already well aware of the math and the variables, and proceeds accordingly.

As long as we're ripping day traders, I'll take a pot shot at one of the dependable themes here. It always strikes me as hilarious. The theme is not to pay attention to the market, to merely allow the long term logical index fund path to enable gains. Yet for all the focus elsewhere, there's certainly a glee to report that it's swell to be heavy in bonds, during the stretches that the market is tanking. Nobody pays attention, except apparently during those downturns. Of course, those threads have been absent the past few days. But they'll show again. :mrgreen:
Yet OP isn't, which is why many are so worried for him... If professional day traders who know all the rules have so much trouble beating the market, what is going to happen to this guy?
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