Taxes for day-traders

See the embedded video for a quick summary of the major tax issues for traders and what business trader status means. Obviously I am not a CPA and I have no formal accounting training. Please see JK Lasser’s Your Income Tax 2012 and Robert Green’s Tax Guide for Traders. If you want to really get hard-core, see the relevant IRS publications:

IRS Publication 550
(the portion of this that relates to business traders as opposed to investors is excerpted below the video)

Please note that futures contracts are treated differently and I do not address that in the video.

Here is the relevant portion of IRS Publication 550 on business traders:

Special Rules for Traders in Securities

Special rules apply if you are a trader in securities in the business of buying and selling securities for your own account. To be engaged in business as a trader in securities, you must meet all the following conditions.

  • You must seek to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation.
  • Your activity must be substantial.
  • You must carry on the activity with continuity and regularity.

The following facts and circumstances should be considered in determining if your activity is a securities trading business.

  • Typical holding periods for securities bought and sold.
  • The frequency and dollar amount of your trades during the year.
  • The extent to which you pursue the activity to produce income for a livelihood.
  • The amount of time you devote to the activity.

If your trading activities do not meet the above definition of a business, you are considered an investor, and not a trader. It does not matter whether you call yourself a trader or a “day trader.”


You may be a trader in some securities and have other securities you hold for investment. The special rules discussed here do not apply to the securities held for investment. You must keep detailed records to distinguish the securities. The securities held for investment must be identified as such in your records on the day you got them (for example, by holding them in a separate brokerage account).

How To Report

Transactions from trading activities result in capital gains and losses and must be reported on Form 8949 and Schedule D (Form 1040), as appropriate. Losses from these transactions are subject to the limit on capital losses explained earlier in this chapter.

Mark-to-market election made.   If you made the mark-to-market election, you should report all gains and losses from trading as ordinary gains and losses in Part II of Form 4797, instead of as capital gains and losses on Form 8949 and Schedule D. In that case, securities held at the end of the year in your business as a trader are marked to market by treating them as if they were sold (and reacquired) for fair market value on the last business day of the year. But do not mark to market any securities you held for investment. Report sales from those securities on Form 8949 and Schedule D, as appropriate, not Form 4797. See the 2011 Instructions for Schedule D.

Expenses.   Interest expense and other investment expenses that an investor would deduct on Schedule A (Form 1040) are deducted by a trader on Schedule C (Form 1040), Profit or Loss From Business, if the expenses are from the trading business. Commissions and other costs of acquiring or disposing of securities are not deductible but must be used to figure gain or loss. The limit on investment interest expense, which applies to investors, does not apply to interest paid or incurred in a trading business.

Self-employment tax.   Gains and losses from selling securities as a trader are not subject to self-employment tax. This is true whether the election is made or not. For an exception that applies to section 1256 contracts, see Self-Employment Income earlier under Section 1256 Contracts Marked to Market.

How To Make the Mark-to-Market Election

To make the mark-to-market election for 2012, you must file a statement by April 17, 2012. This statement should be attached to either your 2011 individual income tax return or a request for an extension of time to file that return. The statement must include the following information.

  • That you are making an election under section 475(f) of the Internal Revenue Code.
  • The first tax year for which the election is effective.
  • The trade or business for which you are making the election.

If you are not required to file a 2011 income tax return, you make the election by placing the above statement in your books and records no later than March 15, 2012. Attach a copy of the statement to your 2012 return.

If your method of accounting for 2011 is inconsistent with the mark-to-market election, you must change your method of accounting for securities under Revenue Procedure 2011-14 (or its successor) available at Revenue Procedure 2011-14 requires you to file Form 3115, Application for Change in Accounting Method. Follow its instructions. Enter “64” on line 1a of the Form 3115.

Once you make the election, it will apply to 2012 and all later tax years, unless you get permission from the IRS to revoke it. The effect of making the election is described under Mark-to-market election made, earlier.

For more information on this election, see Revenue Procedure 99-17, on page 52 of Internal Revenue Bulletin 1999-7 at


Disclaimer: I AM NOT A CPA OR TAX EXPERT! What I say above may be wrong. Please consult your CPA or tax lawyer for tax advice. I use Green’s accounting firm to prepare my taxes. The links for the above books are using my affiliate link. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well..

Some important advice for those who use offshore brokers like Suretrader

I received the following in a detailed email from my CPA. As always, get your own tax advice, but I did want to put out some information excerpted from my CPA’s email:

As part of the Hiring Incentives to Restore Employment Act enacted in 2010, U.S. citizens and resident aliens living in the U.S. and holding specified foreign financial assets with an aggregate value exceeding either $50,000.00 ($100,000 if filing Married Filing Joint, (“MFS”)) on the last day of the taxable year, or $75,000.00 ($150,000 if filing MFJ) at any time during the taxable year, must report certain information about these assets on Form 8938.

Failing to file Form 8938 when required could result in a $10,000 penalty, with an additional penalty up to $50,000 for continued failure to file after IRS notification, the IRS noted. A 40 percent penalty on any understatement of tax attributable to non-disclosed assets can also be imposed.

Just keep that in mind if you have decided to open up an account at SureTrader after Timothy Sykes recommended them.

[Edit 4/16/2012: This page on the IRS website indicates a significantly lower, $10,000 threshold for reporting foreign accounts on a different form, Form TDF 90-22.1]

Disclosure: I have no connection to SureTrader. I have an ongoing business relationship with Tim Sykes that is explained in my terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

I no longer recommend stock chat

My InvestorsUnderground affiliate link redirects to this page. I stopped using InvestorsUnderground stock chat in December 2010 and I stopped recommending the chat at the same time. I do not recommend products or services that I do not use. This should not be considered a recommendation against IU chat — I simply don’t know enough to have an opinion anymore.

My old affiliate link now redirects to this page.

[Post updated 7 November 2018]

Disclosure: I used to be an affiliate of InvestorsUnderground (IU) stock chat, for which I received 50% of a new subscriber’s first month’s payment and 25% on an ongoing basis. I have not received any affiliate payments from them since December 2010. I am no longer a member of InvestorsUnderground stock chat; my membership ended at the end of 2010. I had subscribed to IU since its inception at the beginning of 2009 and I paid the standard rate of membership for charter members, which was $99/quarter (I also was a member of the free predecessor chat, Green on the Screen, for 6 months starting in summer 2008). From 2009 through 2010, I received a total of $5,720.39 (net of Paypal fees) from Pietro Rossa Trading (the Nevada corporation through which Nate Michaud runs InvestorsUnderground). This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

A few links to help with pump & dump research

I read these messageboards without fail. All these messageboards are active and have optional RSS feeds.

SI Paid Mailers
iHub Franklin, Andrews, Kramer, and Edelstein (FAKE)
iHub DD Support board and Fraud Research Team
ihub Spam and Scam
The Penny Stock Bar (Cheers)

Websites / Blogs
These are the best blogs that cover pump and dumps.

The Financial Investigator (Roddy Boyd)
The Street Sweeper
David Baines at the Vancouver (BC) Sun
TheWorm_06 – Roberto aka TheWorm_06 has unmasked numerous frauds on his blog.
ShareSleuth – Financed by Mark Cuban.
Citron Research – Short seller Andrew Left has unmasked many penny stock frauds. (has nice details on big promotions) (owned by a stock promoter) (owned by a stock promoter)

Disclosure: No links to the above message boards except that I do poste on the iHub DD Fraud Research board. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

My thoughts on various brokers

See the video for my thoughts on the various brokers I use. See also my first impressions of Speedtrader and my review of SogoElite. [Edit 6/21/2011 — Subsequent to me posting this video Sogotrade has changed hands (Genesis Securities sold it to Wang) and the borrows for shorts are not good there anymore. I recommend against using Sogotrade.]

Full resolution video

More posts on brokers:

How to borrow shares to short
An introduction to short selling at Interactive Brokers
Interactive Brokers brings the stock loan marketplace to the independent trader

HOD list: How to find stocks breaking out to new highs
My Interactive Brokers Traders Workstation configuration / workspace
How to scan for pre-market gainers using Interactive Brokers

Disclosure: Short 2,000 ANTS and 5,000 HAUP. No positions in any other stocks mentioned. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

HOD list: How to find stocks breaking out to new highs

Are you curious how I find stocks making new highs so quickly. Watch the video as I show and explain the “HOD list” or “high of the day” list.

Disclosure: No positions in any stocks mentioned. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

First thoughts on SpeedTrader

See the video for my review of Speedtrader after using it for a few weeks. Much thanks to Nate of the InvestorsUnderground stock chat for urging me to try SpeedTrader and helping me to set it up.

Disclosure: Short 10,000 BLUG. No positions in any other stock mentioned. I am an affiliate of InvestorsUnderground and Speedtrader. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

Q&A: Trading OTC stocks premarket, screening for stocks intraday, & huge runners

Video #1:
1. How can one get a fill on an stock in the pre-market, particularly with Interactive Brokers?
2. What do you think of Equityfeed (versus other methods of screening for stocks intraday such as the HOD list or IB’s market screener)?

Video #2:
1. What do you think about stocks that run huge in one day such as ZANE (up 600% on March 4, 2010). Do you buy them?

Disclosure: Long 8,000 shares of STTN and short 3,000 ZANE. No positions in any other stock mentioned. This blog has aterms of usethat is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

My Interactive Brokers Trader’s Workstation workspace / configuration

Like how my workspace on Interactive Brokers Traders Workstation (IB TWS) looks? Why not download it and try it out yourself? This includes all my settings including order defaults and display setting. Keep in mind that I have optimized it for my trading style and my monitor size (22″, 1900 x 1280). Let me know what you think if you give it a try. Also, please be aware that I have certain order presets (such as discretionary amount) that are not suitable to most traders. Please use this workspace only to see how I have it configured and to get ideas for your own workspace. Do not just load it and trade with it, not knowing all the presets I have. One preset I have is to have a ‘discretionary’ amount of 3 cents, such that the software will try to fill any limit orders 3 cents beyond the limit. Due to changes in IB’s software I do not think it is now possible to remove that setting.

GoodeTWS3-5-2012.xml (1.2 megabyte configuration file; Right click and save the file to your desktop, then in TWS go to File -> Restore Settings and select this file)

Disclosure: No positions in any stock mentioned. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

Q&A: How to deal with the wash sale rule & trader tax status

Many traders do not understand wash sale rules; failing to do so can lead to huge tax problems. Below is the definition of wash sales and how to account for them according to the IRS.

Wash Sales

You cannot deduct losses from sales or trades of stock or securities in a wash sale.

A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:

  1. Buy substantially identical stock or securities,
  2. Acquire substantially identical stock or securities in a fully taxable trade,
  3. Acquire a contract or option to buy substantially identical stock or securities, or
  4. Acquire substantially identical stock for your individual retirement account (IRA) or Roth IRA.

If you sell stock and your spouse or a corporation you control buys substantially identical stock, you also have a wash sale.

If your loss was disallowed because of the wash sale rules, add the disallowed loss to the cost of the new stock or securities (except in (4) above). The result is your basis in the new stock or securities. This adjustment postpones the loss deduction until the disposition of the new stock or securities. Your holding period for the new stock or securities begins on the same day as the holding period of the stock or securities sold.

In the video I describe how I use a program, Tradelog, to account for wash sales. Another option is to become a mark-to-market (MTM) trader. To be a MTM trader you must fit the criteria to have trader tax status (as opposed to investor tax status).

Disclosure: No positions in any stock mentioned or shown. I am a client of Robert Green’s CPA firm. I am not a tax professional. This blog has a terms of use and you can find all my disclaimers and disclosures there as well; my full terms of use is incorporated by reference into this post.