When planning money day trading, you need to understand short term capital gains tax.
This is not negotiable. Every successful trader has to pay taxes. It is illegal not to do so.
I know. Taxes are a boring subject. But that is necessary information.
It reminds me of shooting my video on Read SEC Filings with Michael Goode, my first millionaire student. * It’s boring, but important to understanding the market.
If you are here to learn about taxes, you have likely made, or are expecting, some money trading stocks. Also note that this is all for informational purposes only. Do you have any serious questions? Contact a licensed tax advisor in your area.
And remember to stay safe. Don’t let early wins bloat your ego or the market will humiliate you.
If you’re reading this before you start making money, this is the right mindset. Always prepare for the future by studying and educating yourself.
Everyone has to pay taxes. So getting off to a quick start with what you might expect can only help you in the future.
Let’s go over short term capital gains tax and what to know before trading.
What is a Short Term Capital Gain?
If you sell a “capital value” at a profit, that is considered a capital gain.
Investments include stocks, bonds, real estate, and precious metals – to name a few.
I trade penny stocks and teach my students to do the same. Hence, what I’m most interested in is short-term capital gains in stocks.
When a trader sells a position for a profit, the money they make is taxed by the US government.
An important factor in determining your capital gains tax rate is how long you held the asset.
Long Term vs. Short Term Capital Gain: What’s the Difference?
The holding period of a share affects your tax rate.
Any asset that you hold for more than a year is long-term. If you hold a stock for a year or less, it is considered short-term.
I’m a day trader, so I usually hold positions for a few minutes. Sometimes I swing trade and hold overnight, but rarely longer.
That means almost all of my capital gains are short term.
Long-term gains are typically less taxed – the rate can range from 0% to 20%.
The government records short-term capital gains as regular income. This means that you can pay 10–37% depending on your income class.
Again, that’s just a rough idea. Contact a professional for assistance with taxes. It’s complex stuff, and that’s what they’re trained for.
Anyway, I think if you want to pay less tax you could just hold your positions for more than a year.
This does not work for me. The stocks I play are volatile. I have no idea what they’re going to do in the next few minutes. Some of these companies could be gone in a year. And I agree to pay taxes. To get used to something.
Years of study and experience help me capitalize on these sketchy stocks. * Paying higher taxes seems minimal risk compared to the volatility of penny stocks. Do you need help to survive volatile markets? Check out my free Volatility Survival Guide. Day trading is no joke – prepare for the wild ride.
We have just scratched the surface on short-term capital gains and taxes. Let’s dive into more details.
Short-term capital gains tax rates
As I said earlier, you can expect to pay anywhere from 10% to 37% tax. But do you know that these numbers can change annually. Stay up to date on tax legislation.
State taxes on short-term capital gains
So far we’ve talked about federal taxes. Perhaps your state government also wants a piece of the pie.
The tax rates vary depending on the state. Find out about the rules for your place of residence. Making tax mistakes can be annoying – and costly.
This can all be confusing, I know. If you need help, get in touch with a professional who will guide you through the process.
Special prices and exceptions
I have good news and bad news … I’ll bring you the bad news first.
If you kill it in the stock market and make shiploads of cash, you may have to pay extra taxes.
Net investment income tax (NIIT) may apply if you exceed the income level for your category. It’s only an extra 3.8%, but it’s important to know if you qualify.
The good news is that some US states do not tax capital gains.
If you live in one of these areas, you only have to pay federal capital gains tax. You should keep this in mind if you plan to move.
Do you see how education can help you navigate the financial industry? Read on to find out more.
How are short term capital gains calculated?
You are only taxed on the realized profit.
That is, until you sell your position, you will not pay any tax on it.
Once you sell a stock for more than you bought – including commission – the government can tax the profits.
And withholding taxable income is illegal, so listen …
How much you tax depends on a number of factors.
First, what kind of assets are you selling? We’ll stick with stocks for this post.
Then the government wants to know how to submit your records – single, married, head of household.
No, Uncle Sam doesn’t want to know if you’re available. The government taxes people differently depending on loved ones and other factors.
It also matters what tax bracket you are in. Your total income determines your tax class.
I could post a spreadsheet to help you figure it out, but this is good research for you. In addition, the government can change the brackets annually. There are many tax calculators. Do your research to find an exact year in which you are making the filing.
How to apply for short term capital gains
Please see the IRS website for the most current information. And again, if you have any questions, find a licensed professional in your area.
The IRS is specific to US taxes. If you live in another country, you will submit elsewhere.
I cannot emphasize enough the importance of understanding this aspect of the stock market. It is important to build your knowledge account before thinking about your trading and bank accounts.
Making money buying and selling stocks won’t mean much when the IRS shows up on your door. It’s a rookie move.
Short term losses
“But Tim, I don’t have any short-term capital gains.”
OK, let’s say your trading is not going well and you have lost money.
Most traders lose, so it hasn’t been much …
You can potentially deduct the money you lose in the market from the rest of your income. That means you may be able to pay less tax.
According to the IRS website, traders can deduct up to $ 3,000 in losses. And if you lose more, you may be able to deduct more losses from next year’s income. *
There are exceptions to this. Laundry sales can eliminate the tax loss incentive.
A wash sale is when someone sells a below average position for a loss. Then they buy a similar stock at a lower price. The rule tries to prevent tax loss sales.
Speak to a professional to find out if you can deduct your trading losses from your taxes and how much you can deduct.
Too many losses lately? Time to slow it down and learn harder. Take my 30 day boot camp to build a great trading foundation day in and day out.
Frequently asked questions about short term capital gains
Of course, you have other questions about short-term capital gains. I will do my best to answer …
Do investors making money from IRAs have to pay short-term capital gains tax?
This is a better question for a tax professional. As I understand it, some IRAs are not taxed until you start withdrawing the money. However, once you deposit money, the government can tax your realized gains as regular income. But I would ask a licensed accountant for more information.
Are dividends capital gains?
The government classifies dividends as capital gains. You will have to pay tax on it when it is time to file.
When are short-term capital gains taxes due?
This varies from year to year and where you live. Typically April 15th is the tax day and deadline for filing and paying your taxes. But that date can change. For example, due to the pandemic, the U.S. government has postponed the 2020 tax filing date to May 17, 2021. The dates for filing state taxes differ by location. Do your research to find out when to submit.
Short Term Capital Gains: The Bottom Line
If you are planning to make money in the stock market, you need to know this.
Sure, taxes are a boring subject and nobody looks forward to paying them. But this is an industry and a life reality.
There are rules that you have to follow no matter what you do. There will always be taxes no matter how you make money.
But getting started early on can lead to a clearer path into the future. Just by reading this article, you have set the course for future success. But it’s not over yet.
To be successful as a day trader takes a lot of hard work and experience. If you think you have what it takes Apply for my trading challenge.
I do not accept everyone. If all you are looking for is hot picks this is not the place. All of my multi-million dollar students studied for months and years to get to where they are today. **
Get the right mindset and start studying. Education is your greatest asset, whether you’re researching short-term capital gains or your go-to patterns. Timpani!
Did you have to apply for capital gains tax? Is this your first introduction? Comment below, love to hear from all of my readers!
Disclaimers of Liability
* Note: This is in no way intended to be legal or financial advice. Always consult a licensed professional in your state or jurisdiction before making any tax or legal decision.
** Please note that these type of trading outcomes are not typical. Most traders lose money. It takes years of dedication, hard work, and discipline to learn how to trade. Individual results may vary. Trading is inherently risky. Before making any trades, remember to do your due diligence and never risk more than you can afford to lose.