How to Pay Taxes on Day Trading

How to Pay Taxes on Day Trading
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Buying and selling stocks on a daily basis can be exciting and profitable. However, the allure of a profitable trade needs to be balanced with considerations of the taxes you must pay. In fact, once you understand the guidelines for taxation on day trading, you can determine if your potential profits on any given trade offset your tax burden enough to make the trade attractive.

Tally your short-term gains and losses. A short-term trade occurs when you hold a stock for a year or less, while a long-term trade means you hold a stock for more than a year. The Internal Revenue Service requires you to subtract short-term losses from short-term gains to calculate your day-trading profit. For example, if you had $40,000 worth of successful short-term trades and $10,000 worth of losses, your net profit would be $30,000.

Calculate your ordinary income tax rate. This is the rate you pay on any earned income. It is typically higher than the capital gains rate the IRS allows on long-term trades. Count your day-trading profits like you would wages, and look up your tax rate on the latest tax table from the IRS. This is the percentage of tax you should set aside each month or quarter on all earnings, including that from day trading.

Total your margin interest and brokerage fees. If you have the ability to borrow money from your broker so you can buy more stock than you have cash for, you pay interest. You can deduct the cost of that interest from your day-trading profits. You can also deduct trading fees your broker charges. Ask your broker for an end-of-year summary of interest and trading charges, and deduct these from your profits.

Calculate self-employment tax. The IRS considers day-traders to be self-employed. This means you must pay the portion of Social Security that an employer normally pays for employees, as well as Medicare taxes that an employer normally pays. For 2013, the self-employment tax rate is 15.3 percent on the first $113,700 of income and 2.9 percent on income above $113,700.

Fill out the appropriate tax forms. You must use Form 8949 and Schedule D to report your day-trading activities.