Tax Strategies for Day Traders

Introduction

• Presenter: Ross Cameron, full-time trader.
• Background: Started trading in 2001, turned a $583.15 account into over $10 million.
• Goal: Share tax strategies to minimize capital gains taxes on trading profits.

Common Tax Overpayments by Traders

1. Short-term capital gains tax:
   • Treated as ordinary income, higher tax bracket.
   • Comparison: Less tax on trading profit vs. W2 income due to lack of employment taxes.
2. Wash sales disallowed:
   • Inflated taxable income due to disallowed losses.
   • Traders cannot write off losses due to frequent trading of the same stock.
3. Limited loss write-off:
   • Can only deduct $3,000 of losses against other income.
   • Limits tax relief on substantial trading losses.
4. Retirement account contributions not utilized:
   • Strategies are legal and encouraged for tax savings.
5. Trading expenses not deducted:
   • Expenses like seminars, software, and equipment often neglected.

Importance of Tax Efficiency

• More tax-efficient traders can retain more profit.
• Strategies to start now for future benefits.

Strategies for Zero Capital Gains Tax

1. Moving to Puerto Rico (Act 60)
   • Zero capital gains taxes for residents living 6 months + 1 day annually.
   • Controversial as only new residents benefit.
   • Major tax savings but requires relocation.
2. Day trading in a Roth IRA
   • Tax-free growth and distributions after age 59.5.
   • Limitations: Annual contribution cap ($7,000), subject to PDT rule.
   • No leverage or shorting allowed in IRAs.

Strategy for Active Traders

Trader Tax Status and Mark-to-Market Accounting

• Trader Tax Status:
  • Deduct necessary and reasonable trading expenses.
  • Requires substantial and regular trading activity.
• Mark-to-Market Accounting:
  • Exempts from wash sales.
  • Allows full deduction of trading losses against other income.
  • Must file by tax due date for the applicable year.

Day Trading as a Business

• Business Formation:
  • Form an LLC or corporation (S-Corp election) for business structuring.
  • Allows for organized tracking of business expenses and deductions.
• Benefits:
  • Additional contributions to a solo 401K, allowing up to $69,000 in deductible contributions.
  • Deduct health insurance premiums, segregate business expenses.
  • Opportunity for investing in tax credit eligible projects for further deductions.

Conclusion

• Strategies include moving to Puerto Rico, leveraging retirement accounts, taking advantage of trader tax status, and marking to market.
• Emphasize setting up a Roth IRA as a straightforward strategy for most traders.
• Seek advice from CPAs to optimize tax strategies effectively.
• Treat trading as a business for maximum tax efficiency.