Income Tax Rules for Day Traders

Income Tax Rules for Day Traders
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A day trader is a stock investor who usually makes many trades during the same day. These stock positions will usually be closed by the end of the market day. Day traders may invest in stocks, options, derivatives, futures or currency markets, profiting off small price movements in equity values. The IRS offers a number of tax benefits for day traders.

Mark to Market

In the United States, schedule D of IRS income tax form 1040 allows day traders to claim $3,000 in capital losses. Day traders rely on capturing slightly more price increases than price losses when making trades. Put simply, day traders lose a lot of money each day, but they try to make up for it in positive trades. Since day traders will have much more than $3,000 in capital losses annually, the IRS allows mark to market traders to deduct an unlimited amount of losses. Instead of schedule D, mark to market accounting uses form 4797. To qualify, day traders must trade the same stock within a 30-day window.


Day traders are considered to be self-employed if they work for themselves and are not a member of a larger financial firm. Day traders can deduct all of their investing expenses such as computers, Internet service and telephone service on schedule C of form 1040. A U.S. investor who makes fewer trades has to write off her expenses on schedule A, which only allows for a maximum write-off of 2 percent of adjusted gross income.

Fees and Interest

Day traders frequently borrow money on margin. This means that they borrow money in the short term for a set interest rate, using their current stock holdings as collateral. Day traders can write off margin account interest. These professionals also may write off any broker commissions or account usage fees paid over the current tax year.

Income Tax

Day traders rarely qualify for long-term capital gains tax rates as they make short-term trades. As of 2010, short-term capital gains rates in the United States match earned income tax rates. For the 2010 tax year, day traders pay marginal tax rates ranging from 10 percent to 35 percent. Single-day traders receive an $8,375 standard deduction, while married couples receive a $16,750 deduction. To fall into the highest income tax bracket, day traders must earn at least $373,651 as of 2010. Day traders who have a retirement portfolio not related to their primary business can qualify for lower tax rates, as long as they hold onto these assets for a year.