Day Trading Taxes can be quite a tricky situation. First off, let me tell you that I am not accountant, so in case you run into problems with the IRS I am sincerely not responsible for the brilliant decisions you made that brought into “that moment”.
Secondly, let me tell you that this article is for taxes in the United States. If any of you have detailed information about taxes for day traders in other countries please contact me via my contact page so I can update this post with that information.
First off, we always want to be above board with the IRS
In court we are innocent until proven guilty, with the IRS we are guilty until proven innocent. We don’t mess with the IRS. No matter where I go or what I do, I always make sure to stay above board with the IRS. With that being said let’s get into the good stuff.
First of all, understand that you will be considered self employed if you don’t have a business entity for yourself and you are going to pay more taxes with that option. You don’t need a fancy LLC because you aren’t going to trade other’s people’s money right? RIGHT? If you are going to take that kind of responsibility then you need to make sure you setup an LLC to protect yourself.
The best business structure for a day trader is an S-corp. An S-corp is just an extension of yourself, only in a business form, your technically still considered self employed. You pay yourself a “reasonable salary” which you will pay at your current tax rate and the following amount you can pay to yourself in the form of a disbursement, wait for it, for a 15% tax rate.
Being an S-corp, your wife can be paid for cleaning the hou…. ahem, doing admin work, your kids can be paid for doing whatever you want the IRS to know they are doing besides spending your money. You can spread the money via whoever you want to in order to spread the money around to bring down your tax rate.
Incorporating In Another Country
Although it may be suspicious to the IRS, it is not illegal to own a company overseas or a have another company pay you that is based in another country. With the current financial crisis that is plaguing the financial systems of countries around the world we want to consider a country that has a sound government, a strong financial system, and somewhere that doesn’t let you chew gum.
Let’s think about his, Bingo! Singapore.
Yes, chewing gum is illegal in Singapore. As undemocratic to you as it may sound, I want a country that has control because when it comes to my money I don’t want someone else controlling it. Singapore has never had bank failure, ever. There are banks where you can keep your money in any currency that you choose. I am currently working on the details of this option, stay tuned for details.
Saving 95,100 on your day trading taxes
Welcome to my world, when you live outside (and work) for more than 330 days out of the year you are eligible for a tax break of up to $95,100 to be exact. It’s called the foreign income tax exclusion and I won’t repeat all the fancy words the IRS uses however, it basically states that if you work overseas for a foreign company or your office is physically located overseas then you qualify for this exemption.
And guess who lives overseas and never comes back to the United States?
Still no idea? I travel quite a bit and used this exemption to only pay $3,000 in taxes last year, legally. Traveling is expensive you know. Have kids? Want to be close to home? Consider Canada, I lived in the city of Toronto for 4 months and can attest it’s a fabulous city.
Nuances for taxes for day traders
One very unique that we can do with NinjaTrader and other day trading platforms is trade with more than one account. This is something very unique for older traders, imagine trading your own account for income while you day trade your very own (tax free) retirement account via a Roth IRA?
Read that again.
You can setup more than one account or even trade certain accounts on certain days to save for your retirement and even a college kids fund. The more responsible thing would be to spend your money on traveling around the world like me.
That’s all for now, I plan on updating this post as more information comes available for the UK and Aussie gents.
Cheerio & Happy Trading.