Hi everyone, First post, and self-declared trading newbie here I'm a lover of technical analysis and, having spent most of my time analyzing engineering problems, I've decided to branch out and learn the ins and outs of trading on the market. Special focus on market indicators, stochastic analysis, etc. I'm also in the middle of putting together a .NET program to cleanly display market data from Quandl's Wiki EOD as a fun project (I know, I'm probably one of millions doing this). This forum has been an incredible resource for me over the past several months so I figured I'd post a question that's been on my mind. The short of it: How do people afford taxation on short-term trading (on the scale of days to months, rather than years)? The long of it: I have a friend who has a normal 8-5 job and makes well below $100K. He does short-term trading on the side and, with his method of technical analysis, says that it "sure as hell doesn't make me rich", but does supplement his income rather nicely. So, being new to this, I looked up the tax codes and found that for long-term trading (longer than a year) you get taxed upon realization of gains at 15%, and for short-term trading (shorter than a year) you get taxed at your income level upon realization of gains. So let's say that hypothetically, he averages just one trade a month: he's realizing gains 12 times in a year. Assuming he keeps all of his gains from each of his trades in the market (i.e. to hop from one stock to the next), he'd still get taxed at the end of the year as if he had taken those gains and put them in a bank account somewhere. So in my mind this boils down to one of two scenarios here: 1.) I'm completely wrong about my assessment, which is entirely feasible OR 2.) He had better have enough money lying around on the side to handle paying taxes on his trades at the end of the year, because he sure isn't living off of his market worth... I guess one way to ensure you're able to handle taxation on your trades would be to liquefy some amount of your gains as you make each trade and put it aside? Some help in understanding this would be great here. I feel like I'm missing a key piece of information.
It's basic financial planning. A fundamental. As your liability comes due, you should be raising your cash balances to get ready for the estimated tax bill. If you can't even give yourself that leeway, then just imagine what an adverse market condition would do to a levered trader in a margin account. As a trader, you need to know when to keep your powder dry and even ignore perceived opportunity when the planning requirements deal with a greater certainty.
Thanks for the insight, xandman. So I guess this means you need to have some cash in reserves when starting down the short-term trading path. Or at least cash out some of your gains (if any) to pay for the estimated taxes down the line.
Long Term or Short term. You have to integrate every aspect of trading activity as a subsidiary of "ME" Corporation. And, that involves finances. You don't exactly have to cash out. You can just maintain a bigger cash reserve. It is an exercise in discipline and risk management. It makes you aware of the potential return distributions of your trading strategies. If a blown account can seriously mess up your financial picture, definitely take money out.
Depending on which State you live in and what Accounting method you use things can get ugly if you push yourself in a higher tax-bracket(that's what our goal is right, never allow higher taxes to prevent you from making money, that logic always blows my mind! I refuse to take a capital gain of $100,000 or more because I don't want to pay over 30% Fed and State Taxes (depending on your scenario or being single) so many folks have tweaked brains regarding paying taxes. Xandman do you use a partnership or C-Corp? Your MTM obviously but did you decide to jump in to a entity?
C corp leads to double taxation And a partnership is a structure to be used in an LLC is for liability protection. I am a one man operation. I have a checking and a savins. That's it.
Trade section 1256 products and you are taxed using the 60/40 rule. 60% is taxed at the long term rate and 40% at the short term rate. DEFINITION of 'Section 1256 Contract' A type of investment defined by the Internal Revenue Code (IRC) as a regulated futures contract, foreign currency contract, non-equity option, dealer equity option or dealer securities futures contract.
Uh oh........ You are entitled to waste some time trying to use math to "solve" the market problem. If that stuff worked why do 90% of traders fail? I would like to save you a little time searching for the holy grail. http://www.jigsawtrading.com/surviving-day-trading-free-ebook/ I am not affiliated at all except for being a customer of Jigsaw. This e-book which is free and really opened my eyes. About a year or so ago I was all excited about technical analysis and posted something here about possibly studying for the CMT. https://www.mta.org/eweb/dynamicpage.aspx?webcode=chartered-market-technician A nice poster replied "You don't want to go down that rabbit hole....." Whilst he wasn't specific he did make me re-evaluate my direction. If only he had said look at order flow trading it would have cut six months off my quest.