When it comes to day trading, one of the most important things to understand is how to calculate your capital gains tax. This will ensure that you are properly reporting your gains and losses to the IRS, and it will help you maximize your tax benefits. Here’s a quick rundown of how to calculate your capital gains tax.
Short-Term vs. Long-Term Gains
The first thing you need to understand is the difference between short-term and long-term gains. Short-term gains are defined as gains on assets held for one year or less, while long-term gains are defined as gains on assets held for more than one year. Short-term gains are taxed at your ordinary income tax rate, while long-term gains are taxed at a lower rate. As such, it’s important to know which category your gains fall into.
Capital Gain Taxes on Stocks
If you’re day trading stocks, then your capital gains will fall into one of two categories: short-term or long-term. Short-term capital gain taxes on stocks are calculated using your marginal tax rate—that is, the tax rate you would pay on your next dollar of income. For example, if you are in the 25% marginal tax bracket, then your short-term capital gain taxes would be 25%.
Long-term capital gain taxes on stocks are a bit different. For starters, there are three possible tax rates: 0%, 15%, or 20%. Which rate you pay depends on your overall taxable income and filing status. For example, if you’re single and have a taxable income of $39,375 or less, then you would pay 0% in long-term capital gain taxes; if your taxable income is between $39,376 and $434,550, then you would pay 15%; and if your taxable income is greater than $434,550, then you would pay 20%.
Capital Gain Taxes on Options
If you’re day trading options, then your capital gains will also be subject to either short-term or long-term capital gain taxes—depending on how long you held the option contract.
Specifically, short-term options contracts are taxed at the same rate as ordinary income (i.e., your marginal tax rate), while long-term options contracts are taxed at the same rates as long-term stock contracts (i.e., 0%, 15%, or 20%).
Bottom Line
As a day trader, it’s important that you understand how to calculate your capital gains tax so that you can properly report your gains and losses to the IRS. The good news is that it’s not overly complicated—although there are a few things you need to know. In general, though, capital gains on stocks are taxed at either your marginal tax rate (for short-term gains) or at one of three lower rates (for long-term gains). Meanwhile, capital gains on options contracts are taxed at either the same rate as ordinary income (for short-term gains) or at the same rates as long-term stock contracts (for long-term gains). Take all the guesswork out of your calculations by using Traderfyles and generate IRS Ready reports in minutes.
