Taxes on day trading in Africa can leave you scratching your head. But if you mark hundreds or even thousands of flea markets each year, it’s in your best interest to understand how Uncle Sam will view your habit. Not only can you face a pile of paperwork, but those hard-earned profits may feel significantly lighter once the Internal Revenue Service (IRS) takes a cut. This page outlines tax laws, rules and implications. It will cover asset-specific provisions before concluding with key preparation tips, including tax software.

Investor vs Trader

So, how does day trading work with taxes? Intraday income tax will depend on the category in which you fall ‘trader’ or ‘investor’. Unfortunately, as an IRS spokesman pointed out: ‘The question is clear; the answer is not. ” You must therefore follow the guidelines set forth in the 70,000-page tax code and consider decisions in applicable case law.

Investor

If you don’t qualify as a trader, you will likely be seen as an investor in the eyes of the IRS. If this is the case, you will have a less advantageous daily tax rate in the United States. Your gains and losses must be accounted for on Form 8949 and Schedule D. Your expenses fall under the category of “various itemized deductions.”

This means you can’t claim a home office deduction and you have to depreciate equipment over several years, instead of doing it all at once. On Schedule A, you also combine your investment expenses with other items such as costs you incurred in tax preparation. You can also write off only the amount that exceeds 2% of your adjusted gross income.

Classification

The first step in reporting day trading taxes is to determine which category you will fit into. Investors, like traders, buy and sell securities. However, investors are not considered to own the trade or security. Instead, their benefits come from the interest, dividends and capital appreciation of their chosen bonds.

The crucial difference between whether you are entitled to deductions on page 1, as opposed to deductions from Schedule A against income, rests on whether you have a ‘trade’ or ‘business’ of selling securities.

The bad news is that ‘trade’ or ‘business’ is not clearly defined anywhere in the long tax code. Instead, you should look at recent case law (outlined below) to determine where your activity fits.

Trader

Spend your days buying and selling assets? If so, you likely fall under the dealer umbrella. A title that can save you serious cash when you need to file tax returns.

Classification

Day trading tax laws and recent cases tell us that you are a ‘dealer’ if you meet the requirements tested in Endicott vs Commissioner, TC Memo 2013-199. The two considerations were as follows:

1. The trade of the individual was considerable.

2. The individual aimed to profit from the price fluctuations in the daily market movements, rather than to profit from longer term investments.

In this case, the taxpayer’s primary strategy was to buy shares of stock and then sell put options on the underlying stock. His goal was to profit from the premiums received from selling call options against the correlating amount of underlying stock he owned.

He usually sold call options that had an expiration period of between one and five months. Endicott hoped that the options would expire, allowing the total amount of the premium received to turn a profit. He did not trade options on a daily basis, due to the high commission costs associated with selling and buying call options.

Endicott then deducted his trade-related expenses on Schedule C. This reduced its adjusted gross income. However, the IRS disagrees with the deductions and instead moves them to Schedule A. They insist that Endicott is an investor, not a trader.

Number of trades

One of the first things the tax court looked at when setting out the criteria above was how many trades the taxpayer carried out per year. They also looked at the total amount of money involved in those trades, as well as the number of days in the year on which trades were executed.

Endicott made 204 trades in 2006 and 303 in 2007. Then in 2008 he made 1,543 trades. The court ruled that the number of trades was not material in 2006 and 2007, but that it was in 2008.

Amount of money

In 2006, Endicott made purchases and sales totaling approximately million. In 2007 the total was about million, and in 2008 it was about million. The court agreed that these amounts were substantial. However, they also said, “the management of a large amount of money is not unclear as to whether the operating activity of a filer constitutes a trade or a business.”

Important points

From this case and other recent tax rulings in Africa, a clearer picture emerges of what is required to meet the definition of ‘trader’. The most important are the following:

• You spend a significant amount of time trading. Ideally, this is your full-time occupation. If you are a part-time trader, you have to buy and sell multiple assets every day.
• You can demonstrate a regular pattern of making a large number of trades, preferably almost every day the market is open.
• Your goal is to profit from short-term price fluctuations, rather than long-term profit.

‘Dealer’ Benefits

The US tax rate on day trading looks favorable to the ‘trader’. Complying with their obscure classification requirements is worth it if you can. This is because, from the perspective of the IRS, you are the activity of a self-employed individual. This allows you to deduct all your trade-related expenses on Schedule C.

This includes home and office equipment. This includes educational resources, phone bills and a variety of other costs. However, it is important that you keep receipts for any items, as the IRS may request evidence to prove that they are used solely for business purposes.

On the other hand, if you are classified as a trader, you can write off the amount that is more than 2% of your adjusted gross income. Not to mention the Schedule C write-offs will adjust your gross income, increasing the chances that you can deduct all of your personal exemptions in full, and also take advantage of other tax breaks that are phased out for higher adjusted gross income levels.

Then there’s the fact that you can deduct your margin account interest on Schedule C. Throw in the fact that you don’t have to pay self-employment tax on your net profit from the trade, and you realize that this is a pretty sweet deal.

Market to Market Traders

There is another clear advantage and it focuses on the write-offs of taxes on day traders. Normally, if you sell an asset at a loss, you must write off the amount. If you, a spouse, or a company you control buys the same stock within 30 days, the IRS considers it a “wash sale” (further details below). This brings significant tax pain.

Fortunately, you can jump this hurdle by becoming a ‘branded’ trader. This will automatically exempt you from the wash sale rule.

Here’s what you do: on the last trading day of the year, you want to pretend you’re selling any shareholding. You still own those assets, but you book all the notional gains and losses for that day. You will then enter the new year with zero unrealized gains or losses. It appears as if you just repurchased all the assets you pretended to sell.

This brings another distinct advantage in terms of day trading profit taxation. Usually, investors can deduct only