Day trading can be an extremely lucrative job; you can make as much in one deal as other people make in an entire year of work. However, these high wages also come with high fees in the form of taxes.
Day traders can pay an extremely high amount in taxes each year. The more money you make, the higher taxes you pay. Traders who hang onto their investments for more than a year pay drastically less in taxes, while the full-time traders can pay nearly 40% in taxes—but usually make much more money.
Self-employed Americans pay some of the highest taxes in the US. As a day trader, you need to be strategic about your tax right-offs, income, and claimed business expenses. This article will explore how much you can expect to pay in taxes as a day trader and how you can lower this amount legally.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
Day Trading as a Career
A multitude of Americans use day trading as a way to supplement—or create—their income. Day traders can make anywhere from a few hundred extra dollars a month to hundreds of thousands of dollars a year.
However, day trading is not a reliable source of income, and to pursue it full-time, you need to stay afloat on months when your profits aren’t surging. You also need the wherewithal to budget yourself. Day trading is a form of entrepreneurship, and if you can’t hold yourself to a budget, you’ll likely be in deep debt after the first year.
Entrepreneurs and Taxes in the USA
Being an entrepreneur in America is a right of passage. It’s the stuff this country was built upon—capitalism, success, work ethic. While self-made businessmen and women are true assets to our economy, becoming one doesn’t come free.
Entrepreneurs in the USA are seen as both individuals and businesses by the IRS. The IRS is the Internal Revenue Services provider to the USA.
They uphold the standards and laws of the US Department of Treasury while providing a gateway between the everyday American and the government. The IRS is the agency that will educate you about the fees you are expected to pay as a self-employed individual and the faculty that will reprimand you if you fail to do so.
As an entrepreneur in the United States of America, you will need to know how tax brackets work. Each tax bracket is set with a range of income, and as the income rises, the amount of tax owed does as well. Let’s take a look at the tax chart from Benzinga for long and short-term investment income:
| Gross Annual Income | Long-Term Tax Rate | Regular Tax Rate |
|---|---|---|
| Up to $9,325 | 0% | 10% |
| $9,326 to $37,950 | 0% | 15% |
| $37,951 to $91,900 | 15% | 25% |
| $91,901 to $191,650 | 15% | 28% |
| $191,651 to $416,700 | 15% | 33% |
| $416,701 to $418,400 | 15% | 35% |
| $418,401 or more | 20% | 39.6% |
How Much Should You Expect to Pay in Taxes?
As you can see, the amount of taxes you may need to pay as a day trader climbs very quickly in relation to the amount of money you make. If you make $500,000 US a year, not only will you be a very successful trader, but you’ll also be expected to pay almost 40% in taxes each year. That equates to almost $200,000 in taxes—no small fee, to be sure.
If you’re in your beginnings as a full-time day trader, you should put aside 20-30% of your income for tax purposes. It may seem like a large amount of money—but think of it this way—if you put aside too much, you’ll have a nice bonus after your taxes are paid.
Tips to Lower Your Taxes
One of the main benefits of being a self-employed individual is writing off your business expenses. All of the money you put into trading can potentially be put back in your pocket, as long as you document your purchases and prove that they are imperative for your business.
The following are some of the best things you can do to lower your taxes as a full-time day trader.
Keep All of Your Receipts
As a “sole proprietor” in the eyes of the IRS, all of your financial claims and tax returns will be thoroughly scrutinized. To ensure that you are covering all of your bases and can validate all of the financial breaks you’ve given in your tax return, you need to keep your receipts.
These receipts will stand as proof that you purchased the things you say you did on the day you said you bought them. Receipts may seem scary and messy, but in reality, every receipt you save can be money in your pocket.
Log Your Wins and Your Losses
Another important way to legitimize not only your trading business but also yourself as a self-employed individual is to record all of your wins and losses. Ideally, the IRS would like to see a day-to-day catalog of absolutely every transaction, but at the pace, you’ll be moving, this might not be possible.
Instead, try to keep track of every trade over 1,000 to 2,000 dollars. As you become more experienced, you’ll formulate a way to document these trades, but at the beginning of your career, be sure to pay extra attention to sales made above the $1,000 mark. That tends to be “real money” in the IRS’ eyes.
Track All of Your Income
Again, the best way to defend yourself from any tax issues is to track the details of every purchase and source of income you have. It can be painstakingly boring to document every little transaction, but under the right circumstances, even your morning coffee can be written off.
These little purchases add up to big money, a truth that all entrepreneurs either know or come to learn.
Don’t Hide Anything
One of the worst things you can do when it comes to your taxes as a day trader is to hide things. Day traders are not given very much mercy when it comes to taxes, and many try to hide their illegitimate trades under very fragile veils of deception.
To avoid paying extra fees and tickets where you don’t need to, you should stay clean in all of the documentation of your trades. If you have nothing to hide, the IRS has nothing to find, and you’ll discover that these early positive relationships will echo throughout your day trading career.
Stay Active in Trading
To be able to make the cut for all of these fantastic tax breaks, you need to stay active in trading for enough time every week to be considered “self-employed.” If you only trade a few times a month, you likely won’t qualify as a full-time trader and won’t be able to take advantage of any of the financial write-offs.
Even if you are only planning on trading part-time, you should consider dedicating at least 20 hours a week to trading. This number of hours is enough for the IRS to consider that you take trading seriously and are investing in a side hustle, not just a lucrative hobby.
Author’s Recommendations: Top Trading and Investment Resources To Consider
Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.
- Roadmap to Becoming a Consistently Profitable Trader: I surveyed 5000+ traders (and interviewed 50+ profitable traders) to create the best possible step by step trading guide for you. Read my article: ‘7 Proven Steps To Profitable Trading’ to learn about my findings from surveying 5000+ traders, and to learn how these learnings can be leveraged to your advantage.
- Best Broker For Trading Success: I reviewed 15+ brokers and discussed my findings with 50+ consistently profitable traders. Post all that assessment, the best all round broker that our collective minds picked was M1 Finance. If you are looking to open a brokerage account, choose M1 Finance. You just cannot go wrong with it! Click Here To Sign Up for M1 Finance Today!
- Best Trading Courses You Can Take For Free (or at extremely low cost): I reviewed 30+ trading courses to recommend you the best resource, and found Trading Strategies in Emerging Markets Specialization on Coursera to beat every other course on the market. Plus, if you complete this course within 7 days, it will cost you nothing and will be absolutely free! Click Here To Sign Up Today! (If you don’t find this course valuable, you can cancel anytime within the 7 days trial period and pay nothing.)
- Best Passive Investment Platform For Exponential (Potentially) Returns: By enabling passive investments into a Bitcoin ETF, Acorns gives you the best opportunity to make exponential returns on your passive investments. Plus, Acorns is currently offering a $15 bonus for simply singing up to their platform – so that is one opportunity you don’t want to miss! (assuming you are interested in this platform). Click Here To Get $15 Bonus By Signing Up For Acorns Today! (It will take you less than 5 mins to sign up, and it is totally worth it.)
Conclusion
Day traders can pay a large amount of taxes due to the high-profit nature of their jobs. If you want to minimize your taxes as a day trader, you should attempt to work at least 20 hours a week in your trades. This number will usually satisfy the IRS that you take trading seriously and should be able to write off any related business expenses, lowering your tax payments dramatically.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
Affiliate Disclosure: We participate in several affiliate programs and may be compensated if you make a purchase using our referral link, at no additional cost to you. You can, however, trust the integrity of our recommendation. Affiliate programs exist even for products that we are not recommending. We only choose to recommend you the products that we actually believe in.
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