Day Trading Expenses You Cannot Deduct from Your Income Taxes
10 of 11 in Series: The Essentials of Getting Started with Day Trading
Day traders incur some expenses that can’t be deducted from income taxes. It’s disappointing, but at least if you know what day trading expenses they are upfront, you can plan accordingly.
Commissions: Every time you make a trade, you have to pay a commission to your broker. It may be small, but you have to pay it. And you can’t deduct that cost. Before you splutter in outrage, read this: You can’t deduct it, but you can add it to cost and subtract it from the proceeds of your trade.
Including the commission in the basis of your trade works like a deduction in terms of the amount of tax you pay, but it’s better for you that it’s not a deduction because it’s not subject to the limitations that affect the deductibility of other expenses.
If your state charges transfer taxes on securities, they are handled the same way as commissions.
Stockholder's meetings: Companies hold annual meetings for their shareholders each year, usually at or near the company headquarters. Sometimes they are deathly dull, but others are extravaganzas where the company shows off new products, showcases major accomplishments, and takes questions from anyone in attendance. And a few involve contentious issues that can lead to protests and fighting, which is entertaining to watch if you aren’t directly affected.
For long-term investors, these meetings can offer valuable insights on a company’s prospects. Day traders probably wouldn’t find them very useful. Either way, the IRS won’t let anyone deduct the costs of transportation, hotel stays, meals, and other expenses involved in attending a stockholders’ meeting.
Investment seminars: The financial services industry offers all kinds of conventions, cruises, and seminars for day traders. You could spend your days attending training seminars instead of actually trading, if you were so inclined. You’re welcome to go to these, and in many cases, you should. You might learn things that would help you trade more effectively. However, you can’t deduct the costs.
There’s some gray area here. You can’t deduct the costs of attending seminars, but you can deduct the costs of investment counsel and advisory services. Some seminars might qualify as investment advice. This is why you need an experienced tax adviser to help you out.
Did you notice that two of the nondeductible expense categories have the potential to involve travel? The IRS does not want people buying ten shares of Hawaiian Electric Industries stock and then trying to write off a trip to the company’s annual meeting in Honolulu, nor do they consider cruises that happen to include a talk by the author of a book on investing to be bona fide investment counsel. They see these activities as vacations, and vacations are not tax deductible.