Day Trading Taxes and Costs

Learning about the basics of day trading taxes is essential if you plan on getting involved in day trading on a regular basis. Day traders also have to be aware of other costs that can negatively impact their ability to make money in the stock market. Here are a few things to consider about day trading taxes and costs.

Day Trading Taxes

Day traders regularly make several trades per day. They buy and sell stocks very quickly and attempt to make small, regular profits. The point of this type of trading is not to buy and hold like many other investors do. Instead, the day trader is trying to take advantage of small fluctuations in the prices of a stock. 

When a trader engages in this type of stock trading, they will fall into a different tax category. The IRS has set up rules that favor long-term traders. If you hold ownership of a stock for more than a year, you will have to pay long-term capital gains taxes on the amount of money that you earn from the sale of the stock. However, if you do not hold the stock long and sell it quickly, you will have to pay short term capital gains taxes on the amount. This will default to your marginal tax bracket. If you are in the highest tax bracket, this means that you could pay as much as 35 percent on this money.

Many traders fail to take into consideration how much they will have to pay in taxes and end up being surprised when the tax bill arrives. If you are going to be successful day trading, you need to be able to make enough money to cover the taxes on your trades and still be able to make a profit.

Costs

Another variable that you will need to consider as a day trader is the costs that you will incur from trading. The costs of day trading can add up quickly if you trade frequently enough. When you buy stock, you are going to have to pay a commission to a stockbroker. You can choose to work with a full-service broker or a discount broker. A full-service broker will provide you with more individual attention but they are also going to charge you quite a bit more for every trade that you take.

Many day traders find it more beneficial to work with a discount brokerage. By doing this, you will be able to lower the cost of each trade and your costs of trading overall. 

When you have a large commission to worry about, you might find yourself staying in trades longer than you should in order to make up the difference. Many times, this can lead to mistakes in your trading and large losses. Try to find a broker with the lowest commission so that trading costs will not affect your profitability.

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