Trading Taxes US

Like any other source of income, earnings from trading are subject to taxation. Upon selling capital or financial assets at a higher price than you bought it, you’re said to have made a capital gain. Trading taxes on capital gains vary depending on multiple factors, including your country and the holding period.

Whether you’re swing trading stocks, crypto, forex, or any other instrument, your gains are all subjected to taxation. Understanding trading taxes can be complex. This is because you must decipher multiple obligations and rules, depending on the region you’re trading from. This article will provide insight into how trading taxes in the US are applied. 

How Does the US Classify Trading Taxes?

Unlike Trading Taxes in the UK, where the HMRC classifies traders as private investors, speculative, and self-employed, in the US, traders fall into two groups, that is investors and traders. Although the two terms can be used interchangeably, their tax obligations differ widely depending on the category you fall under. Here is how each category varies tax-wise.

Investor

The US tax authority considers you an investor if you don’t trade (buy or sell securities) regularly. Suppose you are a full-time employee. In that case, you rarely trade. This is because perhaps you lack adequate time to analyze, place trades, and monitor their progress appropriately.

As an investor, you are at an advantage because your deductions are significantly limited. However, they may pile up, particularly if you do it for a long time. Also, investors need to determine when they will be paying their trading taxes. For instance, they can decide to pay annually or quarterly depending on their preferences.

Trader

This category is for those traders who spend substantial time analyzing, executing and monitoring trades. You need to spend approximately 16 plus hours every week to fall under this category. Therefore, you need to be an active trader to qualify for this category. As a trader, your earnings are subject to various deductions, including taxes and other expenditures. 

How to Pay Less Trading Taxes in the US

Paying trading taxes may sound like a nightmare. However, failing to pay can land you with significant consequences. For instance, you may have to pay significant penalties or even serve a jail term for tax evasion. Therefore, you should think a couple of times before avoiding taxes. It isn’t worth the consequences.

However, there are ways you can minimize your tax bill on trading various assets. One way you can do so is by holding your position longer to become a long-term investor. You can hold your investments in tax-advantaged accounts, like Roth IRA or 401k.

Another strategy you can adopt is tax-loss harvesting. It involves selling financial instruments at a loss, which offsets your gains. Typically, these losses do not expire. Instead, responsible agencies carry them forward into the upcoming year. Suppose your trading gains are less than your losses. In that case, you can subtract the difference when filing your tax returns, up to $3,000 annually. 

A third approach you can use to avoid taxes on trading stocks is by donating them. Suppose you’re a charitable individual whose portfolio has a high value. In that case, you can cherry-select a few stocks and donate them to charity. Although you won’t recognize capital gains by doing so, you’ll potentially pay less taxes based on your tax bracket. 

Tips to Help You Prepare Your Trading Taxes in the US

Preparing your trading taxes can be hectic, especially if you’re new or inexperienced in keeping your trading records. However, failure to file correct taxes can lead to bigger problems. Therefore, you need to master some tricks to help you comply with trading taxes. Here are some tips to get you started:

Maintain Your Trading Records. 

It is the best way to ensure that you file accurate trading taxes because you can easily retrieve your trading data. Also, keeping good records ensures that you spend less time preparing your taxes, giving you extra time to trade. Therefore, it is one of the best options for those who do trading for a living.

Pay the Exact Amount of Taxes You Owe. 

Unless you want to be on the wrong side of the law sooner or later, you should pay the correct amount of trading taxes. Some traders end up thinking that they can beat the system and pay less taxes. This is because some over-the-counter (OTC) trading platforms aren’t registered with the Commodities Futures Trading Commission.

However, it’s worth noting that you won’t get away with it. Eventually, the Internal Revenue Service (IRS) will find irregularities in your tax records. As a result, you will have to pay much higher tax avoidance penalties than what you owed.

Mind the Tax Deadline

In the US, you need to choose the type of your tax situation by a specific date (usually by January 1). Suppose you’re a new trader. In that case, you have to decide at any time before you execute your first trade. Failure to make a decision before the deadline can lead to further difficulties in the process of preparing your trading taxes.

For instance, you may end up selecting an inappropriate tax situation. Doing so implies that you will prepare inaccurate trading taxes and trading records. Therefore, you need to observe the deadline and select the most appropriate tax situation early enough. 

Seek Professional Trading Tax Advice

Preparing trading taxes in the US can be complex, especially for beginners. You can avoid making trading tax mistakes by seeking professional advice. This way, you can learn more about how to prepare trading taxes accurately. Also, you’ll gain insight into how to go about everything around the subject. However, you should scrutinize the tax advisor to validate their authenticity before seeking their advice. 

The Bottom Line

Trading and taxes in the US go hand in hand. You need to determine your tax category, investor or trader so that you can file accurate taxes. Remember tax compliance is critical because failure to comply can be costly. Therefore, always ensure that you pay the exact amount of trading taxes you owe. This way, it will save you on the cost, time and effort needed to resolve noncompliance issues.