What's up everyone? All right? So the topic of today's episode is taxes, Trading and Taxes. It's a good thing you're checking out this video now because you want to make sure you get ahead of it. And the fact is, you have the opportunity to make some affirmative decisions about how you handle your taxes. If you make the right decisions, those can compound for months, years in the future.

And the benefit is Huge. All right. So short-term capital gains, wash, sales, and mark to market accounting. These are our three main topics for today.

The fact is, as a trader, all of your profits from a position held for less than one year is going to be categorized as a short-term capital gain in contrast to a long-term capital gain. Long-term capital gains have preferred preferential lower tax rates, which encourages investors to hold positions longer and not, you know, bail out and then jump back in. So it is what it is. but as a day trader, I mean it just is not applying to us.

All of our gains are less than a year, so they're all going to fall into the column of a short-term capital gain. So how's the short-term capital gain taxed? It's taxed at your regular income tax bracket. Now, I want to say a couple things here before we go further. One, I'm not going to talk about what those brackets are because they're always changing.

So check out some links in the description or go over to the Irs website to see where the brackets are right now, how big they are and and where the cutoffs are Number two. I want to remind you that I'm not a Cpa, so I encourage you to consult your own Cpa. do your own research because this is not accounting advice. I'm just sharing with you.

what I've learned from all my years is filing taxes. As a trader, I have my own Cpa. I don't try to file my taxes myself, and I don't really think probably anyone should. It just makes sense to use some type of service to help file your taxes, but of course, make the decision.

That makes the most sense for you. So we've got our short-term capital gains and are going to be taxable at your regular income tax bracket. And so some people will say, geez, I made a hundred thousand dollars in trading profits. I didn't realize I was going to have to pay 20 000 or more of that in tax.

Well, here's the thing. if you had made that same amount of money as a long-term capital gain. Yes, the tax would be lower, but if you made that same amount of money as a W-2 from an employer, you would actually pay more tax because you would have your income bracket for making a hundred thousand dollars. Plus you would have Social Security and you would have Medicare all right.

Now If you made that hundred thousand dollars as a freelancer in your own Llc, you know you've got your own side business self-employment tax 15, so you know this is sort of the area where if you compared the short-term capital gains to self-employment tax, inc, self-employment income, or W-2 income, you're actually going to be paying a slightly lower rate on the Irs website. and I'll have the link down the description. They clearly state that short-term capital gains are not subject to self-employment tax. So yes, you're definitely paying more than a long-term capital gain.

But you're paying less than uh W-2 or 1099 from self-employment so there's some benefit there. A little silver lining, but I know you are still paying a lot in tax. And what makes it worse is when you get your 1099 from your broker and you see this column that says Wash Sales exempt. So what the heck is a wash sale? Well, uh, they create the wash sale because what people used to do.

They found this little loophole in their in the taxes where on December 31st, if they had a position they were holding and they were down, uh, ten thousand dollars on it, they're down ten thousand dollars on the position. They would say you know what? it's a long-term capital gain. I'm not going to be able to write off that ten thousand dollars against my gains for the year. So I'm gonna sell the position.

I'm gonna book the ten thousand dollar loss. It's gonna reduce my taxable income. Uh, from you know, let's say 90 000, you know, down minus 10 to 80 000 and then on January 2nd, I'll just buy the position back so I'll be back in it and my profit loss on it will be zero. But you know I'll sell.

you know, x number of shares and I'll just buy back the same number of shares. on January 2nd and the Irs said, hold up. No, you can't do that. We're going to say if you buy back a substantially similar and this is in quote, substantially similar position within 30 days, you can't write off that first loss.

You can't do it. That's not. You're not allowed to do it. And so that inadvertently had a huge effect on traders like you and me.

Because traders like us, we're constantly buying and selling, buying and selling. And there may be many times where we buy a stock, sell it for a loss, and then buy it back, maybe even in the same day. So how the heck does that affect our our taxable gain? So on the 1099, you're going to see long-term capital gains, short-term capital gains. and let's say your short-term capital gains are like a hundred thousand dollars.

And then you might see capital. Uh, wash sales exempt and let's say it's ten thousand dollars. So then your actual taxable is 110. it's the Wash sale plus the short-term capital gains.

So it makes your taxable the total taxable gain larger. One of the things that I noticed in my first few years of trading. Even though I was trading a lot of the same stocks day after day after day, the amount that I had exempt in Wash sales at the end of the year wasn't really that high. So this is an area where as retail traders, we don't have a lot of insight into how broker dealers in the clearing firms are considering something substantially similar and then flagging the initial loss to be exempt, right? So it's a little tricky and I don't even know if there's a way mid-year to contact your broker and find out where you sit with Wash sales because it could become substantial and it could become a problem.

But then there's also just simple logic to it. like if you were trading one style. let's say you're trading Apple all year long. You buy, sell, buy, sell by sell.

At the end of the year, you made you know a million dollars on Apple, but you lost. You know, 980 000? So you're really only up 20 grand. Are you telling me you're gonna owe taxes on a million dollars? Obviously that doesn't make sense and it that doesn't make sense in any stretch of imagination, right? It's not the way it works, so there's clearly some formula that as retail traders we just don't have a lot of I don't have a lot of insight into if you do feel free to comment down below and share with us, because that would certainly help me, It would help other traders. So the fact is, we do have some Um profits or our losses that are exempt from writing off due to the Wash Sale rule.

But then there's this other thing called Mark to Market Accounting. All right. So Mark to Market Accounting is kind of interesting. This um, this is sort of in in direct response to Um, the the Wash Sale rule.

We have this Mark to Market Accounting and what Mark to Market Accounting is is it's an accounting type that you apply for with the Irs. and when you apply for it and you are accepted, wash Sales are no more. You don't have any wash sales now. once you get the acceptance notice from the Irs, you do have to send that to your broker so they can update on the back end of your account that you do not have wash sales on your account.

So then at the end of that next tax year you'll have your 1099. You'll probably have no long-term capital gains, you'll have a ton of short-term capital gains, and you won't have anything that's exempt as a wash sale which is great. The other benefit to this is that with to Market Accounting you can write off unlimited losses. And this is something that has come with a little bit of controversy because just like the wash sales were created because some people were using this sort of loophole of selling on December 31st and then buying back with Mark to Market Accounting.

big firms corporations can carry forward these huge losses and write off. I mean, unthinkably big business losses. but you could do it on the trading side as well. So this is what it is for right now.

It's always subject to change Um, I suppose so you could check down the description or I might put a video um, right here. If there's something that has substantially changed, I'll put a video maybe right up here in the corner so you guys could check that out and jump over to that video with new information. but if there, if I haven't put anything there, then this is probably still more or less the way it is. So with Mark to Market Accounting, you can write off an unlimited number of losses.

Now, this isn't something that probably you want to aspire to, Um, but you know it's just worth noting. So if you, um, go to the Irs website Irs.gov down in the description, I'll have a link to tax topics and the topic number is 429. It's traders and Securities and this is where they talk about Um, Section I believe it's 475 F Mark to Market account trading and securities and then they get into applying for the Mark to market election. Uh, They also note that uh, traders should report losses, business gains, and losses on Schedule C and expenses related to trading.

So this is an area where you have an opportunity as a trader depending on how you want to approach this, where if you're running this as a business and being a trader is like running a business. You've got taxes, You've got gains, you've got losses, you've got expenses, you've got computers, you've got internet costs. If you're using 10 of your your home office, you have a dedicated room that is an office for you. Some people use a home office deduction right? So there.

There's a whole number of lists of things that you could do if you want to try to maximize on your tax savings. Some people are going to be more aggressive on this, some people are going to be more conservative, and this is where for some people it gets into forming an Llc for trading for the trading account. And the reason the Llc is so popular is because Llc's are super easy to set up. The income is passed through if it's a single member Llc to your own return.

so you're not having to file a corporate return for the Llc and then a separate return for yourself. It just flows right through to your own return. You get some degree of um, sort of uh, I guess you would say like insurance or protection knowing that your trading account is now owned by an Llc so you have some a protection of that asset which is important and setting up an Llc is super easy, so some people do. And lastly, but probably more importantly is that it makes it very easy to segregate your expenses related trading.

Now you have an Ein, you have an account, you have a credit card for the Llc, and so all your expenses relate to trading, you consolidate in the Llc. It makes the taxes a lot simpler and it makes it very clean. Especially if you're working with an accountant. though, you'll have your P L for the Llc.

This is all the trading profit. And then these are the expenses related to trading. It was my subscriptions, my market data fees. You know this and that that were related to that income.

So you know again, you have to talk to an accountant on this because different accounts will have different points of view on it. Um, you know, and short-term capital gains. Also, self-employment tax. This is an area where, uh, there could be some accounts they might have an opinion on if you're setting up a business.

At what point? What is the nature of that business? What is it doing? If it's all its income is short-term capital gains, then? okay. If there's other business you're commingling in the same Llc, then you can start to have some issues. So make sure you talk to an accountant about all of this stuff, write down your notes, think about what your goals are, and talk to a Cpa. One of the things that I also want to encourage you to think about is tax free or tax deferred accounts.

So a tax deferred account, for instance, would be a 401k oops, or a traditional I Ira, or a tax-free account would be a Roth Ira. Now as you may know, Roth Iras are extremely popular, and there's been some conversation about whether or not the amount of money you can grow in a Roth Ira should be limited because some people have grown them to billions of dollars completely tax-free So again, it's become maybe a tax loophole if you want to call it that, But it's perfectly within your right to trade in a tax-deferred account. And so if you don't need all of the money that you're making right now, does it make sense to start making that step today to trade more in a tax-deferred account so you can plan for your retirement. And these are things that if you start doing them sooner, the sooner you start, the more you can benefit from the compound interest from that.

Good decision. So tax deferred accounts, they're a big plus. There's a lot of brokers, including Td Ameritrade that will let you trade in a Roth Ira, so you know why not. And then if you're trading in that account, you don't have to worry about wash sales because you don't have to worry about taxes.

It's tax-free so think about it. you've got your short-term capital gains. But that's only for trades that are in a traditional cash or margin account in your own name, not tax deferred account. You will have wash sales.

You could apply to Mark to market accounting if you wanted to if you thought it was significant enough. but you may think it's not worth the trouble and you might not be wrong about that. It's whatever makes the most sense for you. And then of course you have moving towards tax deferred accounts.

And then you know Ultimately, probably the best scenario would be that your taxable account becomes long-term investments and dividend Passive fixed income. So if you start getting fixed income passive income from dividend investments that are a long-term capital gain that's at a lower rate. So wouldn't that be sort of the perfect scenario that you've moved as much as possible of your um, short term capital gains into a 401k oops, sorry, uh, an Ira, my goodness or a Roth? All right, that would be great. And then your um, your your regular account that's taxable would be so you know taxable account.

This would be your um, your long-term capital gains. It would be your you know, potentially dividends You you would have, um, fixed income things like that. Maybe Maybe you would also just in general have rental income or things like that again. You know it depends on what your situation is, but your goal would be anything that's a short-term capital gain.

See if you can get that moved over into one of these tax accounts, tax-free accounts, or tax deferred accounts. That would be a good decision, right? And if you're young enough and you start doing that now, the benefits will compound over years and years and years. If you're a little bit older, you know, well then you know you're in a little bit different situation also from tax bracket Roth, Ira and things like that are a little bit different if you're a bit older, so you know there's a lot of different factors there's not. Um, you know one solution for everyone and that's why it's such a good idea to consult a Cpa before you make any final decisions.

So I hope this has been helpful. if it has Hit the thumbs up and I'll put another video here of another one I think you guys should check out if you want to keep learning about trading. All right, I'll see you for the next episode. And that right, There was an entire video with no ads.

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