đ
Day Trading Taxes, IRS Trader Tax Status vs Investor Status in US - YouTube
Channel: Humbled Trader
[0]
Day trading taxes, everyone loves talking
about making big lamborghini money by trading
[7]
an hour a day anywhere in the world.
[10]
But not a lot of people talk about how to
keep that money.
[16]
So you don't get the IRS coming after your
ass every April.
[21]
Before we start here is a mandatory disclaimer:
I am not a CPA nor a financial advisor.
[26]
Iâm not licensed.
[27]
I don't know anything about taxes.
[29]
Everyone's tax situation will be vastly different.
[31]
Itâs your own responsibility to ensure all
your taxes are filed correctly and legally
[37]
by a professional.
[38]
I have no idea what I'm talking about.
[40]
I'm not even American.
[42]
I know what youâre thinking right now, but
but humbled trader, you are Canadian you are
[45]
not even American how would you know anything
about the pain of dealing with the IRS and
[49]
paying taxes here in the US.
[52]
Actually I spent a good 5 to 6 years in the
US studying and working many many years ago.
[57]
So I know a thing or two about parting with
my precious Benjamins every April.
[63]
And yeah, let me tell you, dealing with dual
taxes with the CRA in Canada and the IRS in
[69]
the US was not fun.
[71]
I know I made a day trading taxes video for
the Canadian traders last week.
[76]
But I wanna be fair to my American viewers.
[79]
They deserve their fair share of bad jokes
too.
[83]
This is America!
[84]
Equality for all.
[85]
So in this video, weâll be talking about
day trading taxes in the US, what kind of
[89]
status you qualify for whether as an ordinary
investor or trader tax status. and the associated
[96]
tax breaks you can utilize to save money,
legally.
[102]
All these terrbile jokes, I mean day trading
taxes research really took me a lot of time
[108]
to prepare.
[109]
So Iâd really appreciate if you drop a like
at the bottom of this video.
[114]
So when weâre looking at stock market taxes
in general in the US as a regular investor
[120]
or trader, theres 2 distinct tax rates to
know, long term tax rate, and short term tax
[127]
rate.
[128]
Letâs say you make $100K last year in the
stock market.
[132]
And those were profits from positions you
held longer than a year.
[136]
So basically not from day trades.
[139]
That capital gain would be taxed at only 15%
as long term investments.
[145]
So the total taxes owed to the IRS is $15k,
and your take home is $85,000.
[151]
Thats a pretty favorable tax rate.
[157]
And if the long term gains are less than $37,375
in 2019, and less than $40,000 in 2020, You
[167]
are not taxed anything at all on that income
federally.
[170]
That wasnt a joek btw.
[171]
Which is like, wow, the kindest thing the
IRS has ever done.
[175]
However, if weâre talking about day trading
here, that usually means you buy and sell
[183]
positions often within the same day, that
would be considered short term investments.
[186]
And same thing for swing trading as well,
you are probably holding a position for a
[190]
few days to a few weeks.
[191]
Both day trading and swing trader profit would
fall under short term investment.
[195]
Which is taxed as your ordinary income.
[197]
So that same 100K capital gain would be taxed
at your income bracket at 24%.
[202]
You would owe the IRS $24,000, and the take
home is only $76K.
[206]
This is why itâs so important to keep your
long term investment account and your short
[213]
term day trading or swing trading accounts
separate, for accounting purposes.
[217]
You dont want to have to deal with a nightmare
trying to figure out which investment profits
[218]
are from long term and short term each spring.
[219]
Of course, for both the short term and long
term investment examples are with federal
[220]
tax only, youâll have to factor in the state
tax youâre in yourself.
[222]
Thats the basic summary of what kind of taxes
youâll have to pay if you are a short term
[227]
trader that falls under the ordinary investor
status.
[231]
So if youâre a part time trader trading
on the side while working a full time job,
[234]
beginner trader with a small account, and
really 90% of day traders out there fall under
[242]
this investor status category under the eyes
of the IRS.
[246]
But, as ordinary investor status, which is
90% of day traders out there, you are allowed
[252]
limited tax breaks.
[253]
Yes, You can claim your losses to offset your
gains.
[257]
This works for both long term and short term
capital losses against the gains.
[262]
This is if you are net positive on the year.
[265]
Now, what if you had a terrible year in the
market overall, and you ended the year net
[273]
negative.
[274]
for both investing and day trading.
[275]
You can deduct up to $3,000 of your losses
against your income.
[278]
Yes you heard that right, only $3000.
[283]
So if youâre chasing that penny stock break
out this week and made $1000, but next week
[289]
you do the same and lose $5000.
[292]
You can only claim $3000 out of that $4,000
loss.
[297]
And this is for the entire year, you can only
claim $3,000 loss against your income.
[303]
Thats like, not even enough to afford that
$5000 DVD.
[307]
Any losses over $3,000, its just a straight
loss, its gone, that lamborghini money is
[312]
washed down the drain.
[314]
Just kidding, you can carry over that excess
capital loss credit into the next 8 consecutive
[320]
years.
[321]
Which is better than Canada, Canadian investors
can only carry our losses over for 3 years,
[328]
but we don't have a max $3000 cap, we just
have better jokes.
[332]
That 8 year carry over period for capital
loss in the US, sounds nice in theory, but
[339]
again, each year, you can only use up to $3000
to offset your income each year.
[346]
For long term investors with profits from
over 1 year holding period, thats still not
[353]
terrible since they have very favorable tax
rate compare to ordinary income, but for most
[360]
day traders and swing traders who are considered
short term investors, thats not ideal at all.
[367]
So maybe think twice before chasing those
chat room alerts.
[370]
Just saying, you know.
[371]
As day traders, the only efficient way to
optimize your day trading income and losses
[377]
and pay less tax overall, is if you remember
to smash the like button.
[382]
Theres a new IRS tax reform change in Section
123BS that allows you to pay less taxes if
[391]
you tapped that like button.
[392]
Seriously, remember to talk to your CPA about
it, itâll save you a lot of Benjamins.
[397]
Ok just kidding but not really, as day traders
in the US, the only efficient way to optimize
[403]
your day trading income and losses is if you
qualify for the Trader Tax status, which weâll
[410]
cover in just a little bit.
[414]
Another thing to be aware of if youâre filing
as an investor status, is the wash sale rule.
[422]
Which means that if you sell a stock for a
loss both as a short term or long term investment,
[427]
you cannot claim that capital loss, if you
hold the same position 30 days before or 30
[434]
days after the loss sale.
[436]
Which is an extremely tough restriction, especially
for day traders filing under the investor
[440]
status.
[441]
This rule can easily turn your tax filing
season into a nightmare.
[445]
So make sure to talk to a certified tax professional
when filing your taxes.
[451]
Again, this is just a summary of what I know
regarding day trading taxes in the US.
[457]
talk to a CPA, itâll make your life so much
easier.
[464]
Im sure you know by now, filing as an investor
status for your short term day trading or
[468]
swing trading income really sucks.
[471]
But what if you file as a TTS trader, Trader
Tax status designated trader?
[476]
Spoilers, you get a lot better tax breaks,
but the trader tax status is a lot harder
[480]
to qualify which we will go over in a little
bit.
[482]
The biggest advantage to filing with a trader
tax status is that you can deduct more than
[488]
just the $3000 loss normal investor status
tax filers have.
[493]
As a hyper active day trader, each year you
can claim all of your losses in the market
[499]
against your total income.
[501]
To do so you must make a âmark-to marketâ
election in Section 475 with the IRS by the
[508]
tax filing deadline for the previous year.
[511]
So if you want to make that mark to market
election for the 2020 tax year, then you must
[518]
have that selection made by April 15, 2020
when you are filing for your 2019 tax return.
[524]
But again, thats only if you qualify for the
TTS designation.
[528]
Another benefit of filing with TTS is that
you are not bound by the wash sale rule we
[535]
talked about earlier, since you qualify for
mark to market accounting, which allows you
[538]
to claim all your losses.
[540]
But you must âpretend to sell all of your
holdings on the last day of the year for tax
[545]
purposes, and pretend to purchase them again
in the new year.
[548]
This is just for accounting purpose, again,
talk to your CPA about the specific details
[553]
and your own tax situation.
[554]
One more extremely generous tax break that
TTS designated traders have is the ability
[561]
to write off trading expenses.
[564]
Almost anything you pay for in order to trade
and make money with your trading business
[570]
is considered tax deductible.
[572]
That means you can claim your scanners, news
wires, computers, chat rooms, that $5000 DVD,
[576]
internet bills, as well as part of your rent
or mortgage if you work from home.
[582]
This is once again, far superior than if you
were filing ordinary income as a short term
[588]
investor.
[595]
Because of the TCJA, Tax Cuts and Jobs Act
of 2017, what you can write off as expenses
[601]
against your capital gains has been extremely
limited.
[607]
Now, how exactly do you qualify for this amazing
trader tax status?
[612]
There is actually no IRS statue or regulation.
[617]
But here are some very general rules to see
if you qualify for that status in the eyes
[624]
of IRS.
[625]
You should be spending 30 hours or more on
trading or trading related activities, and
[631]
average about 4 or 5 day trader per day for
most of the tax year.
[637]
So if you are trading part time 1 or 2 hours
before work each day, you don't qualify for
[644]
TTS.
[646]
Your average holding period should be less
than 31 days, this should be an easy one for
[651]
most day traders.
[653]
You should be treating trading as a business
with the necessary software, research tools,
[660]
and a significant trading account.
[662]
If you are using subpar or free tools, nothing
wrong with that, but im just saying, in the
[667]
eyes of the IRS, you are not taking trading
seriously enough as a primary business.
[673]
And also if you are trading with a small account
of $2000 or $5000, thats not a significant
[680]
enough amount for you to qualify for TTS designation.
[685]
Yes we all know that getting the Trader Tax
status is the most tax efficient way to file
[691]
your trading income, but its harder to qualify.
[697]
When I was working in the US and trading part
time, I didn't qualify for TTS either.
[704]
This TTS designation is never guaranteed.
[707]
A trader can qualify for TTS one year but
not the next, or only qualify for part of
[714]
the year.
[715]
if you do not meet the general requirements
I just talked about in the eyes of the IRS.
[720]
There are other ways to qualify, such as forming
an LLC or a C corp.
[728]
But please do your own research and talk to
a CPA on that part.
[731]
Again, Im just a Canadian chilling up north
sipping my maple syrup, and counting my much
[735]
more beautiful looking, but way less valuable
dollar bills.
[737]
Im making this video for the bad jokes, I
dont know what im talking about.
[740]
If you want to learn more details about the
trader tax designation and how to save money
[747]
filing your day trading taxes, ill leave a
few website resources in the description.
[753]
Also feel free to check out my friend, fellow
trading YouTuber Zip Trader Charlie.
[758]
Hes done a few videos on day trading taxes
in the US that go into even more details.
[764]
And remember to drop ravishing comments and
tell him that humbled traderâs bad jokes
[769]
are much better than his.
Most Recent Videos:
You can go back to the homepage right here: Homepage