Tax Forms and Deadlines for the Day Trader
Knowing what constitutes day trading income, what expenses you can deduct, and what special rules apply if the IRS considers you a qualified day trader is all well and good, but when it comes right down to it, you still need to know the more mundane things like what tax forms to fill out and when they’re due.
Use the right tax forms
Here are the highlights of some of the most exciting forms for the modern day trader. Note that they are different for those who qualify as traders by IRS standards than for everyone else who day trades.
Forms for qualified traders: If you make the mark-to-market election on Form 3115, you’re considered to be in the business of trading. Business expenses for individual tax filers are put on Schedule C of Form 1040, Profit or Loss from Business. Then your trading gains and losses are recorded on Part II of Form 4797.
If you have any securities at the end of the year in your trading account, pretend that they were sold on the last business day of the year at current fair market value and then immediately reacquired.
Forms for everyone else: Day traders who are not considered traders by the IRS should itemize business deductions and investment interest expenses on Schedule A of Form 1040. You should attach Form 4952 if you used that to figure your investment interest expense. You report capital gains and losses from your trading on Schedule D of Form 1040, subject to all the limits on losses.
Pay estimated taxes quarterly
If you have been an employee for years and years, all of your tax liabilities may have been covered by your payroll tax deductions. The IRS likes it best that way, because then it gets money all year round. Face it: the easier it is to pay, the more likely you are to do it.
People who are self-employed or who have significant earnings from investments and day trading may generate more income than can be covered from payroll withholding. What you need to do is estimate your tax liability four times a year and then write a check for those amounts. (Otherwise, you could face a penalty at tax time.)
Estimated taxes are paid on Form 1040 ES and are due April 15, June 15, September 15, and January 15.