Do you trade stocks more often than most people breathe? Then you need to understand how Uncle Sam views your habit. Thankfully, there are some strategies that active stock traders like you can use to reduce your tax bill and make preparing your return less of a chore. More tax tips for day traders. But if you spend your days buying and selling stocks like a hedge-fund manager, then you are probably a trader, a title that can save you big bucks at tax time.

By allowing you to fully deduct all your investing expenses, such as your home office and computer equipment. So what are you, you ask, a trader or an investor? This is one of the fuzziest areas of our fuzzy tax code. The only way to define your status is to go by the guidelines laid out in several court cases that have addressed the question. Say you spend 10 hours a week trading and total about sales a year, all within a few days of your purchase.

You aren't spending enough time or trading often enough to satisfy the IRS. How about 20 hours a week and 1, short-term trades a year?

I think that amount of time and trading gets you there. If you choose, you can actually be both a trader and an investor. You must segregate your long-term holdings by identifying them as such in your records on the day you buy in. According to the tax law, traders are in the business of buying and selling securities. Plus Schedule C write-offs reduce your adjusted gross income, which raises the odds that you can fully deduct all your personal exemptions and take advantage of other tax breaks that get phased out at higher levels of adjusted gross income.

All in all, a pretty good deal. All this makes for a pretty funky-looking tax return. Schedule C will have nothing but expenses and no income, while your trading profits we hope will end up on Schedule D. I recommend attaching a statement to your tax return to explain the situation. If you qualify as a trader, the IRS has a deal for you. Under normal circumstances, when you sell a stock at a loss, you get to write off that amount.

Form Capital Gain & Wash Sales Calculator software,Prepare Schedule D (IRS Form )-- Neutral Trend TradeMax®

On the last trading day of the year, you pretend to sell all your holdings if any. Even though you still really hold the stocks, you book all the imaginary gains and losses as of that day for tax purposes. You then begin the new year with no unrealized gains or losses, as if you had just bought back all the shares you pretended to sell.

Wash Trading Definition & Example | Investing Answers

Being a mark-to-market trader has another advantage. But mark-to-market traders can deduct an unlimited amount of losses, which is a plus in a really awful market or a really bad year of trading.

As a mark-to-market trader you should report your gains and losses on Part II of IRS Form For more information, see IRS Revenue Procedure in Internal Revenue Bulletin , which is available at www. How can you possibly account for hundreds of individual trades on your tax return? After all, the IRS wants not only to know your profit or loss from each sale, but a description of the security, purchase date, cost, sales proceeds and sale date.

Then you can transfer all the data into your tax preparation software without breaking a sweat. Truth be told, few people qualify as traders. This advertisement is provided by Bankrate, which compiles rate data from more than 4, financial institutions.

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Here are some tax strategies for you. More tax tips for day traders Trader vs. The courts say you are a trader if: You spend lots of time trading. My reading is, you can also be a part-time trader, but you had better be buying and selling a handful of stocks just about every day. You have established a regular and continuous pattern of making lots of trades several almost every day the markets are open.

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Your goal is to profit from short-term market swings rather than from long-term gains or dividend income. Mark-to-market traders If you qualify as a trader, the IRS has a deal for you.

Drowning in paper How can you possibly account for hundreds of individual trades on your tax return? The rest of us Truth be told, few people qualify as traders. This story has been updated. Also see Why you need to write a will now 7 things you should never do when filing your taxes All the latest Personal Finance stories from MarketWatch.

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