When attempting to day trade taxes, things can be far from simple or easy. When you are attempting to record your taxes, it means that you must find out how to figure out the seemingly endless list of rules. In this short piece we will go over how tax brackets are calculated, as well as multiple other helpful tips.
How Does Day Trading Affect Taxes?
Day trading and taxes are something that are connected and go hand in hand, it will always be an element of day trading. Your taxes will vary, depending on your quantity of trading as well as the remit you are categorised under.
Tax that is placed within trading in the U.K is much different to that of the tax placed on trading in Ireland for example. Below we will mention some typical tax sayings that you may have come across and explain what they mean.
Tax Free?
CFDs, spread and a few others are labelled under the name ‘speculative’ in a country like the United Kingdom for example. As a result of nobody physically owning an asset, these are what will be able to avoid Capital Gains Tax. If you do label yourself as a trader who trades for a living, then income tax may be applicable to you, but in most cases your earned profits are not going to be taxed.
Tax Terminology
In very long and seemingly difficult worded tax documents, it can be very hard to get a grasp of all the terminology within them. Below are a few of the more significant titles that we have made clear on their meaning for you:
Earned Income
Earned income the money that you are making from your current job. In some cases, the tax system that you fall under might not consider your earnings from trading to be classified as earned income, even if you yourself classify it as your job. However, this also means that in some countries you may not be able to obtain any potential retirement benefits upon reaching retirement age.
Investment Income
This is the gross total amount for income that you earn from any property that you may hold for investment before any significant deductions from said investment. This will not involve any capital gains, unless you yourself take it upon yourself to decide to involve them.
Cost Basis
Cost basis is what will represent the total that you had paid for security and commissions. This figure will determine your profits and losses. If the position rises above your original investment, you’ve made a capital gain, or if it sinks below your original investment, you have unfortunately made a capital loss.
Capital Gains
When you earn any profit from purchasing or selling a security, then you have made a capital gain. If you have held a position for under a year, then you should expect to be paying some sort of tax on your capital gains.
Capital Losses
If you have made a loss from purchasing or selling any security throughout a year, then that is when taxes on losses should occur. Although, you can often deduct losses to the amount that you have amassed in capital gains you have earned throughout the year.
Wash-Sale Rule
The wash-sale rule states that you are unable to claim a loss on a sale in a wash-sale. This is when someone decides to attempt to sell their security at a potential loss and within thirty days of that sale attempts to purchase a security of almost identicality.
Differences In Financial Instruments
One thing that does not make any impact on your taxes is whatever you are buying and selling.
No tax system cares about the items that you are trading specifically and purely look at the profits or losses that you are earning or losing via your account. The only thing that will have an impact is the regional differences that you will encounter.
Regional Differences
For an example of regional differences, as previously stated, tax laws will not be the same in the UK as Ireland and other countries.
UK
When most people ask if day traders are required to pay any sort of self employment tax, it will always depend on the trader. There are three categories that tax in the U.K falls under, below they are mentioned.
- Speculative – Speculative is on the same level as someone who takes part in gambling. This is where one is lifted from all tax in their earnings.
- Self-employed trading activity – This is the category where you will be charged tax as anybody who is regularly self-employed in the U.K.
- Private investor – Only your profits and losses will be liable to have to pay capital gains tax upon them.
US
In the United States you are labelled as an investor or a trader when it comes to your taxes. There are two categories that you may be classed as below:
- Trader – This is someone who spends a minimum of 16 hours a week researching and taking part in trade deals on an almost daily basis.
- Investor – If you are not a consistent trader or you have a full-time job on the side, then this is the category that you will most likely fall into.
The difference between these two is that a trader is allowed to subtract his usual expenses, whilst an investor is placed in very controlled environments.
Canada
In Canada, you simply either label your profits as a capital gain or as business income in reference to the CRA, The Canada Revenue Agency. Both situations are explained below:
- Capital gains – When buying or selling securities as a potential investment, a capital gains account is probably the best option for you. This will ensure that your capital gains will only be 50% taxable. Losses can suddenly make this route less friendly, however.
- Business income – If you are only investing in the market to try and attempt to make any potential profits, then this is the route for you.
As a minor addition, keep in mind that business related profits are pensionable and may require you to continue to make contributions at the usual self-employed percentage of 9.9%
India
Once again, there are two categories that you could fall under, both are mentioned below:
- Speculative activity – If you do not have any positions that are being held overnight, then in the eyes of the law you are an intraday trader. This will result in the trades you make being classed as ‘speculative’.
- Speculative business income – This is when your profits become added to your other available incomes. If your total salary was 5 lacs and on the side your daily trade profits are at 2.4 lacs, then the total would arise at 7.4 lacs. This would class you in a taxable category of 20% on all your incomes.
Australia
Australian traders are always exempt from any capital gains tax. Their tax office will see you as a trader if your trading activities are for the purpose of carrying out business activities solely for the purpose of trying to rack up income from any trading you may do. Below are two mentioned categories:
- Income – This is when you have begun investing purely to make some income.
- Frequency – This is for traders who trade consistently with a plan in place and keep professional level records of all their trading transactions.
Consequences of Not Paying
Failing to pay your taxes can result in hefty fines or even jail time in some cases. In the U.K, there is a start of 5% penalty per month, which as you can probably tell will eventually amass to a high amount, all the while you may still be required to do some jail time at some point if you fail to pay in full.
Tips
Here are some tips you can follow when assuming your tax situation as a trader below:
Confirm Your Tax Status with your local tax office
This is when you contact your local tax office and ask them for confirmation of your status upon following their questions and guidelines online.
Keep A Record of all your trades that you have made annually
Always keep a note of every trade you conduct; this leaves no room for mistake if you are trying to figure out how much tax you owe annually.
Consistently contact your tax advisor
Seek advice from your tax advisor on a regularly basis. This is to ensure that you are constantly in the know if any changes may occur.
Download or Use a Software
This will require a lot of paperwork and documents to prove to the taxman every single detail of your trades over the last year. To ease the pain of this process you can use tax calculation software. Turbotax is a great example.
Key Points
Despite the seemingly daunting nature of taxes when trading, they are necessary and can have very scary consequences if avoided. Seek professional assistance and make use of all the tools at your fingertips to ensure that you are fully set when it comes to your tax.
