Many people want to know how stock traders report taxes. The answer may seem complicated, but it doesn’t have to be. Here is a brief overview of the process.
Day Traders
There are two types of stock traders – day traders and investors. Day traders buy and sell stocks within the same day. Holding times rarely exceed 31 days. They are considered traders by qualifying as a trader in securities. They report trading gains and losses on either form 8949 or Form 4797. Form 4797 is used if an active Section 475(f) election has been granted for the trader. Stock traders also report business expenses on Schedule C or the corresponding business return. If you are not sure if you qualify as a trader in securities consult a qualified tax professional.
Investors
Investors, on the other hand, buy stocks and hold them for longer periods of time – usually at least a year. When they sell their stocks, they may owe capital gains tax. However, there are different rates for long-term capital gains tax and short-term capital gains tax. Long-term capital gains tax is taxed at a lower rate than short-term capital gains tax.
In order to find out which rate you will be taxed at, you will need to fill out Form 1040 Schedule D (or Form 4797). This form will help you calculate your total capital gain or loss for the year.
Once you have completed Form 1040 Schedule D, you will then need to complete Form 8949. This form is used to report specific details about each investment transaction that resulted in a gain or loss. If you are a mark-to-market trader you will need to fill out form 4797 and make sure all open positions at the end of the year are “marked to market”.
Bottom Line
Reporting taxes as a stock trader can seem daunting, but it doesn’t have to be complicated. Keep in mind that there are different rules for day traders and investors. Investors may owe capital gains tax when they sell their stocks, but there are different rates for long-term and short-term capital gains. Depending on your trading patterns and habits you might also have to account for the wash sale rules. Be sure to complete Form 1040 Schedule D and Form 8949 in order to correctly report your taxes. Using a software solution such as TraderFyles can assist with accurate and seamless reporting.
