Day Trading Information
Every trader is aware that capital gains and losses have to be calculated when reporting your taxes for the year, and any capital gains are subject to the capital gains tax.
Yes...if you choose your trades intelligently, you can reduce your tax bite. You can choose when to sell your stock, depending on which choice produces better tax results.
Most traders would agree that 2003 tax cuts created the most complicated Schedule D to-date. While the tax package had its advantages (reduced rates on long-term capital gains and qualified dividends), it also resulted in a Schedule D Capital Gains and Losses) that was 13 lines longer than the previous year with its own 11-page instruction booklet!
So what makes capital gain/loss calculations so complicated?
1) Tax-Lot Matching
Your brokerage Form 1099-B lists all stock transactions throughout the year, but, unfortunately, doesn't identify which tax-lots were sold, the gains and losses, and whether they were short or long term. This means it's up to YOU to match trades and calculate your own gains and losses.
2) The Wash Sale Rule
This rule was implemented by the IRS to prevent investors from generating artificial losses to reduce their taxes. If an investor sells a security for a loss, and re-purchases that security 30 days before or after the sell date, the loss is deferred for tax purposes. Brokers don't keep track of wash sales - again, it's up to YOU to review your trading history to locate wash sales and make the necessary adjustments.
You have a capital gain if you sell the asset for more than your basis. You have a capital loss if you sell the asset for less than your basis. Losses from the sale of personal–use property, such as your home or car, are not deductible.
Capital gains and losses are classified as long–term or short–term. If you hold the asset for more than one year before you dispose of it, your capital gain or loss is long term. If you hold it one year or less, your capital gain or loss is short term.
You may have to report capital gains and losses on Form 1040, Schedule D. If you have a net capital gain, that gain may be taxed at a lower tax rate. The term "net capital gain" means the amount by which your net long–term capital gain for the year is more than your net short–term capital loss. The highest tax rate on a net capital gain is generally 15% (or 5%, if it would otherwise be taxed at 15% or less). There are 3 exceptions:
The taxable part of a gain from qualified small business stock is taxed at a maximum 28% rate.
If you have a taxable capital gain, you may be required to make estimated tax payments.
If your capital losses exceed your capital gains, the amount of the excess loss that can be claimed is limited to $3,000, or $1,500 if you are married filing separately. If your net capital loss is more than this limit, you can carry the loss forward to later years.
I.R.C.§871(a)(2) imposes a flat tax of 30% on U.S. source capital gains in the hands of nonresident alien individuals physically present in the United States for 183 days or more during the taxable year. The 183-day rule of I.R.C.§871(a)(2) bears no relation to the 183-day rule of the substantial presence test of I.R.C.§7701(b)(3) and the exceptions to the residency rules, e.g., exempt individual/days not counted, of that section. Thus, there are situations in which the 183-day rule of I.R.C.§871(a)(2) may apply to individuals who have not crossed the threshold of U.S. residence under of I.R.C.§7701(b)(3). For example, a foreign diplomat, consular officer, or other nonresident alien employee of a foreign government, or nonresident alien employee of an international organization who is visiting the United States in A or G nonimmigrant status for a period longer than 183 days in a calendar year would be subject to the 30% tax imposed by I.R.C.§ 871(a)(2) on his U.S. source capital gains. The same rule applies to a foreign student or scholar visiting the United States in F, J, M, or Q nonimmigrant status whose presence in the United States exceeds 183 days in any calendar year.
Tax answers/options when you sell your Home. We will answer your questions about the tax free home sales and give you options on tax free exchanges So, You got a letter from IRS? We can help. Letters from IRS are scary. We will answer your questions at no charge. S-Corp, LLC, C-Corp, Partnership - Your Choice? Selecting the correct Business Entity is confusing. We will give you the tax options of each Business Entity. How not to pay taxes when you sell income property. We will explain how to do a tax free exchange & not pay taxes when you sell your income property.
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Tax answers/options when you sell your Home. We will answer your questions about the tax free home sales and give you options on tax free exchanges
So, You got a letter from IRS? We can help. Letters from IRS are scary. We will answer your questions at no charge.
S-Corp, LLC, C-Corp, Partnership - Your Choice? Selecting the correct Business Entity is confusing. We will give you the tax options of each Business Entity.
How not to pay taxes when you sell income property. We will explain how to do a tax free exchange & not pay taxes when you sell your income property.