Day Trading Expenses You Can Deduct from Your Income Tax
9 of 11 in Series: The Essentials of Getting Started with Day Trading
Day traders have expenses. They buy computer equipment, subscribe to research services, pay trading commissions, and hire accountants to prepare their taxes. It adds up, and the tax code recognizes that. That’s why day traders can deduct many of their costs from their income taxes.
You’ll make your life as a day trader much easier if you keep track of your expenses as you incur them. You can do this in a notebook, in a spreadsheet, or through personal finance software such as Quicken.
You can deduct investment expenses as miscellaneous itemized deductions on Schedule A of Form 1040 as long as they're considered to be ordinary, necessary, and used to produce or collect income, manage property held for producing income, and directly related to the taxable income produced.
Clerical, legal, and accounting fees: You might use the services of a lawyer to help you get set up, and you'll definitely want to use an accountant who understands investment expenses to help you evaluate your trading strategy and prepare your income tax returns. You can deduct attorney and accounting fees related to your investment income.
Office expenses: If you do your day trading from an outside office, you can deduct the rent and related expenses. You can deduct the expenses of a home office, too, as long as you use it regularly and exclusively for business.
Whether or not you deduct your office, you can deduct certain office expenses for equipment and supplies used in your business. You can usually write off roughly $100,000 in computers, desks, chairs, and the like if you use them for trading more than half the time. (The limits change every year.)
Investment counsel and advice: The IRS lets you deduct fees paid for counsel and advice about investments that produce taxable income. This includes books, magazines, newspapers, and research services that help you refine your trading strategy. It also includes anything you might pay for investment advisory services.
Safe deposit box rent: Have a safe deposit box down at the bank? You can deduct the rent on it if you store any investment-related documents. If you also keep other personal items in the same box, you can only deduct part of the rent.
Investment interest: If you borrow money as part of your strategy, and most day traders do, you can deduct the interest paid on those loans as long as it isn't from a home mortgage (that interest is already deductible) and as long as you're not subject to other limitations. In most cases, this is margin interest, and for most day traders, it's relatively small because few day traders borrow money for more than a few hours at a time.
State income taxes: If you itemize your deductions, you can deduct state income taxes on interest income that is exempt from federal income tax. But you cannot deduct, as either taxes or investment expenses, state income taxes on other exempt income. In most cases, exempt income is related to government bond transactions, and few day traders will work in those markets.
The 50 states all have different rules about taxation of investment income. Some states with little or no income tax handle investments differently. Because there are so many different issues, state taxation is beyond the scope of this Web site. Check with your state revenue department and a state-savvy tax expert to see what you need to know where you live.