TAXES FOR TRADERS

TAXES FOR TRADERS



Think day trade returns come without a catch? Think again, because the IRS has plenty of ways to catch you come April 15. Day trading involves strategies that generate both high returns and high tax liabilities, which can eat away at your total return if you are not careful. Not all of your expenses are deductible, and you might think that you’re day trading, but the IRS will have a different definition of your activities.

Taxes themselves aren’t necessarily bad, because somehow we have to pay for things like roads and schools and national defense. But taxes can be devastating to your personal finances if you haven’t planned for them. You need to consider the tax implications of your trading strategy right from the start and keep careful records so that you’re ready.

Tax issues for day traders are complex and change frequently. Check the most recent federal regulations and work with an accountant or tax expert who has experience in these matters. I’m a reasonably social gal and all, but I’m not going on an audit with you.

Are You a Trader or an Investor?

I cover the differences between investing, trading, and gambling. Day traders aren’t investing — they are looking to take advantage of short-term price movements, not to take a stake in a business for the long term. Unless, of course, you’re asking the IRS about it. The IRS defines trading much differently than people in financial circles do. To the taxmen, you are a trader only if all of the following apply to you:
  • You must seek to profit from daily market movements in the prices of securities, not from dividends, interest, or capital appreciation.
  • Your activity must be substantial; the IRS code does not spell out what substantial means, but it probably means you’re making at least 3,000 trades per year.
  • You must carry on the activity with continuity and regularity. Day trading is more or less your full-time job, you’ve stuck with it for at least six months already, and you plan to keep trading into the next year.

If you trade part-time, have other employment, or are new to the day trading game, the IRS probably won’t let you define yourself as a trader. Don’t care what an IRS agent calls you, as long she doesn’t call you for an audit? Well, understanding the difference between trader and investor in IRS lingo is important to avoid that audit.

Those who qualify as traders enjoy deductions that regular investors don’t.

You might quality as a trader for some of your activities and as an investor for others. If this looks to be the case, you need to keep detailed records to separate your trades, and you should use different brokerage accounts to make the difference clear from the day you open the position.

In political economics, taxation serves two purposes. The first is to raise money for the government. The second is to encourage people to do things that the elected officials who amend the tax code want them to do. Much of the investing tax code is intended to promote the formation and growth of businesses. Short-term day trading doesn’t do that, so the tax law doesn’t offer short-term investors the same benefits that it gives to long-term investors and business owners.

Hiring a Tax Adviser

You don’t have to hire someone to do your taxes, but you probably should. Day trading generates a lot of separate transactions to track, and the tax laws are tricky. Mistakes can end up costing you your entire trading profit.

Do yourself a favor and find yourself a tax expert. You can talk to other traders, get references from the attorneys and accountants you work with now, or even do Internet searches to find people who understand both IRS regulations and the unique needs of people who frequently buy and sell securities, whether or not the IRS calls them traders.

The many flavors of tax experts

Okay, you’re waiting for me to say there’s only one flavor, and it’s vanilla, right? Wrong. Tax experts fall into several different categories, and knowing which is which can help you determine who is best for you.

Certified public accountants

A certified public accountant has studied accounting in college and passed exams that tested her knowledge of a wide range of accounting subjects. Because much of accounting involves income tax preparation, many CPAs specialize in this. CPAs generally have the best combined knowledge of tax laws and tax preparation techniques — but not all of them specialize in or even understand day trading.

Enrolled agents

Enrolled agents specialize in tax preparation. They receive registration from the IRS after passing a two-day, eight-hour exam covering only tax topics. That’s what they know best. They may not be so good at helping you with other accounting needs, such as preparing payroll for your office assistants.

Tax attorneys

Tax attorneys usually work with CPAs; they are called in to study the legality of proposed strategies or represent a client in tax litigation. They aren’t appropriate for most traders, but there may be situations that call for one. 

Storefronts and volunteers: probably not a good idea

Every winter, vacant buildings are turned into tax preparation centers, and the IRS promotes its cadre of volunteers who help people with their taxes. These services can be a boon to the average person who lacks the time or patience to deal with the tax forms. But if you are trader, you’re going to run into complex problems that most of these services are not prepared to handle.

Only CPAs, enrolled agents, and tax attorneys are allowed to represent clients before the IRS in audits, collections, or appeals. Other paid preparers can represent clients in an audit, but they can’t handle more complex matters.

Questions to ask a prospective adviser

After you identify a few prospective candidates to prepare your taxes, talk to them and ask them questions about their experience. You want someone who understands things such as the wash-sale rule and the mark-to-market election and who can help you determine what you owe in taxes and not one penny more.

You’ll feel more comfortable with your tax preparer if you have an understanding of the issues at stake. Even if you are hiring someone — and you should — keep reading this chapter and check the Appendix for more indepth references on taxes and trading.

Here some things you should ask a potential tax preparer:
  • What investors and traders have you worked with? For how long?
  • Have you worked with traders or investors in my state? Can you prepare my state return?
  • Have you helped traders make the mark-to-market election?
  • What is your experience with the wash-sale rule? How will my trading style be affected by it?
  • Who will be preparing my return? How involved will you be?
  • Do you offer tax analysis of trading strategies?
  • What’s your audit record? Why have your clients been audited? What happened on the audit?
  • What are your fees?

It is illegal for tax preparers to base their fees on the size of your tax refund, and it is illegal for them to guarantee you a refund.

You still want to do it yourself?

It’s possible for traders to do their own taxes. If you are comfortable with tax forms, if you are only day trading a little bit, and if I haven’t deterred you yet, you might be able to do this yourself. You need a few things: the proper IRS forms and tax preparation software that can handle investment income.

Everything you want to know about taxes

The IRS, is a treasure trove of tax information. All the regulations, publications, forms, and explanations are there, and some of it is even in plain English. It’s so vast and detailed that you will probably be overwhelmed; I’m not sure there is any page in any IRS publication that does not mention dividends received under the State of Alaska Permanent Fund.

Curious to know about this State of Alaska Permanent Fund? It’s an annual payment made to all residents of Alaska every year, based on the profits of oil pumped in that state. To put this into context, Alaska had 663,661 residents in 2005, according to the U.S. Census Bureau. I think there are two pages of IRS publications mentioning the fund for every person who gets a check from it.

The primary publication that covers the tax implications of trading and other investing activities is Publication 550, Investment Income and Expenses.

Tax preparation software

Those who do their own taxes know that tax prep software is a godsend, and it’s even more valuable for those do-it-yourselfers who trade a lot. The software fills out the forms, automatically adds and subtracts, and even catches typographical errors. In many cases, it can download data straight from your brokerage account, making data entry really simple.

Most of the big brands, such as TaxCut and TurboTax, publish several editions each year — not all of which are set up to import and manage lots of trading data. Among those that have services for investors are TurboTax Premier Investments, TaxCut Premium, and CompleteTax.

What Is Income, Anyway?

Income seems like a straightforward concept, but not much about taxation is straightforward. To the IRS, income falls into different categories, with different tax rates, different allowed deductions, and different forms to fill out. In this section I cover income definitions you’ll run into as a day trader.

Earned income

Earned income includes wages, salaries, bonuses, and tips. It’s money that you make on the job. But even if day trading is your only occupation, your earnings are not considered to be earned income. This means that day traders, whether classified for tax purposes as investors or traders, don’t have to pay the self-employment tax on their trading income. Isn’t that great?

Well, maybe, maybe not. The self-employment tax, the bane of many an independent business person, is a contribution to the Social Security fund. (Employees pay half of the contribution, and the employer pays the other half. The self-employed have to pay the whole thing.)

The problem is that if you don’t have earned income, you are not paying into Social Security. If you are not paying into Social Security, you might not be eligible to retirement benefits. To collect benefits, you have to have paid in 40 credits, and you can earn a maximum of four credits per year. Most employees do this easily, but if you have taken time off work or have a long history of work as an independent investor, you may not have paid enough in.

Any benefits you do collect are based on the 35 years of highest earned income over your work history. Your years of independent trading show up as years with zero earned income, and that might hurt your ultimate benefit.

The Social Security Administration has a handy online calculator, which can help you determine whether day trading makes sense for you right now, given the possible effect on your Social Security benefits.

Investment income

Investment income is your total income from property held for investment before any deductions. This includes interest, dividends, annuities, and royalties. It does not include net capital gains, unless you choose to include them. Do you want to include them? Well, read the next section.

Other than net capital gains, which you might or might not decided to include, most day traders have very little investment income for tax purposes.

Capital gains and losses

A capital gain is the profit you make when you buy low and sell high, and that’s the aim of day trading. The opposite of a capital gain is a capital loss, which happens when you sell an asset for less than you paid for it. Investors can offset some of their capital gains with some of their capital losses to reduce their tax burden.

Those who trade frequently will have many capital gains and losses, though, and they may very well run afoul of complicated IRS rules about capital gains taxation. Day traders get tripped up by capital gain and loss problems all the time. When designing your trading strategy, think long and hard about how much pain taxes might cause.

The financial world is filled with horror stories of people who thought they found a clever angle on making big profits, only to discover at tax time that their tax liability was greater than their profit. In the real world, taxes matter.

Capital gains come in two flavors: short term and long term. You’re charged a low rate on long-term capital gains, which right now is defined as the gain on assets held for more than one year. How low? It’s 15 percent right now.

Short-term capital gains, which are those made on any asset held for one year or less, are taxed at the ordinary income rate, probably 28 percent or more.

Covering all your basis

Capital gains and losses are calculated using a security’s basis, which may or may not be the same as the price that you paid for it or sold it at. Some expenses, such as commissions or disallowed wash-sale losses, are added to the cost of the security, and that can reduce the amount of your taxable gain or increase the amount of your deductible loss.

For example, if you bought 100 shares of stock at $50 per share and a $0.03 per share commission, your basis would be $5,003 — the $5,000 you paid for the stock and the $3.00 you paid in commission.

The wash-sale problem

Let’s say you love LMNO Company, but the price of the shares is down from what it was when you purchased them. You’d like to get that loss on your taxes, so you sell the stock, and then you buy it back at the lower price. You get your tax deduction and still keep the stock.  How excellent is that?

It’s too excellent to be true. The IRS does not count the loss. This trick is called a wash sale. The wash-sale rule was designed to keep long-term investors from playing cute with their taxes, but it has the effect of creating a ruinous tax situation for na├»ve day traders.

Under the wash-sale rule, you cannot deduct a loss if you have both a gain and a loss in the same security within a 61-day period. However, you can add the disallowed loss to the basis of your security.

Here’s an example to show you what I mean. On Tuesday, you bought 100 shares of LMNO at $34.60. LMNO announced terrible earnings, and the stock promptly dropped to $29.32, and you sold all 100 shares for a loss of $528. Later in the afternoon, you noticed that the stock had bottomed and looked like it might trend up, so you bought another 100 shares at $28.75 and resold them an hour later at $29.25, closing out your position for the day. The second trade had a profit of $50. You had a net loss of $478 (the $528 loss plus the $50 profit), but the IRS will disallow the $528 loss and let you show only a profit of $50. 

However, the IRS will let you add the $528 loss to the basis of your replacement shares, meaning that instead of spending $2,875 (100 shares times $28.75), for tax purposes, you spent $3,403 ($2,875 plus $528), which means that the second trade caused you to lose the $478 that you added back. On a net basis, you get to record your loss. The basis addition lets you work off your wash-sale losses, eventually, assuming that you keep careful records and have more winning trades than losing ones in any one security.

To make the calculations easier, several different tax software packages can download trade data from your brokerage account to keep track of your tax situation. Even if you hire someone to do your taxes, tracking your potential liabilities as you trade can help you avoid costly mistakes.

The wash-sale rule applies to substantially similar securities. LMNO stock and LMNO options are considered to be substantially similar, so you can’t get around the rule by varying securities on the same underlying asset. LMNO shares and shares of its closest competitor, PQRS, would probably not be considered to be substantially similar, so you can trade within a given industry to help avoid wash-sale problems.

At an extreme, the wash-sale rule can mean that traders who are in and out of the same securities over and over may be taxed on all their winning trades, without being able to subtract their losing trades for tax purposes. If your winning trades gained $300,000, and your losing trades cost you $200,000, you cleared $100,000 — but the IRS might tax you on the $300,000. Ouch!

There are ways around the wash-sale rule. The obvious solution is to qualify as a trader for IRS purposes and then take the mark-to-market accounting election. Other methods for avoiding the wash-sale rule include trading a given security only once every 60 calendar days and doing all your trading within a qualified retirement account such as an IRA. Some securities are handled differently.

Futures contracts are considered to generate investment income and losses, not capital gains. Profits on options contracts are 60 percent long-term capital gains and 40 percent short-term capital gains, which reduces the wash-sale rule effect. Some traders prefer to work with options and futures simply because it makes tax time easier.

If you have any more clever ideas, be sure to run them through an experienced tax pro first.

Tracking Your Investment Expenses

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. In this section, I go through some of what you can deduct.

You’ll make your life 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 or Microsoft Money.

Qualified and deductible expenses

You can deduct investment expenses as miscellaneous itemized deductions on Schedule A of Form 1040 as long as they are 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 will almost definitely want to use an accountant who understands investment expenses to help you evaluate your trading strategy and prepare your state and federal income tax returns each year. There’s good news here: You can deduct attorney and accounting fees related to your investment income. If your trading operation gets big enough that you hire clerical help to keep track of all those trade confirmations, you can deduct that cost, too.

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. If your trading room is also the guest room, it doesn’t count.

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 of the time.

To get the deduction, you have to spend the money first, and your expenses don’t reduce your taxes dollar-for-dollar. If you are in the 28-percent tax bracket, then each dollar you spend on qualified expenses reduces your taxes by $0.28. In other words, don’t go crazy at the office supply store just because you get a tax deduction. It may be helpful to think of deductible expenses as discounts, because in the end that’s more or less what they are.

Investment counsel and advice

The IRS allows you to 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, such as trade coaching or analysis.

Safe deposit box rent

Have a safety box down at the bank? You can deduct the rent on it if you store any investment-related documents. If you also keep jewelry that you inherited and never wear or 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, youcan deduct the interest paid on those loans as long as it is not from a home mortgage and as long as you are not subject to other limitations. There’s always a catch, isn’t there? In most cases, this is margin interest, and for most day traders, it is relatively small because few day traders borrow money for more than a few hours at a time.

If you borrow money against your account for anything other than investing or trading, you can’t deduct the interest. And yes, most brokerage firms let you take out margin for your own general spending, as a way to let you stay in the market and still get cash.

State income taxes

If you itemize your deductions, you can deduct, as taxes, 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 book. Check with your state revenue department and a state-savvy tax expert to see what you need to know where you live.

What you can’t deduct

While day trading, you will probably incur expenses that can’t be deducted from your taxes. It’s disappointing, but at least if you know what they are upfront, you can plan accordingly.

What? I can’t deduct commissions?

Every time you make a trade, you have to pay a commission to your broker. It may be small, just a few cents per share or a few dollars per trade, 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.

Here’s an example: You buy 100 shares of Microsoft at $29.40 per share, paying a $6.00 commission on the trade. Your total cost for IRS purposes is ($29.40 × 100) + $6.00, which equals $2,946. Later in the day, you sell all 100 shares for $29.50 per share at a $6.00 commission, so your total proceeds for the deal are ($29.50 × 100) – $6.00, or $2,950. Your total profit for tax purposes is $2,950 – $2946, or $4.00.

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.

Attending stockholders’ meetings

Companies hold annual meetings for their shareholders each year, usually at or near the company headquarters. Sometimes they are deathly dull — the board of directors sits around a conference room in a law office and goes through a boilerplate agenda with nothing to discuss. 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, and it’s just as well, because the IRS won’t let anyone deduct the costs of transportation, hotel stays, meals, and other expenses that might be involved in attending a stockholders’ meeting.

Attending 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. Bummer.

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.

Naturally, there are limitations!

You didn’t think the IRS would let you take all your deductions automatically, did you? Of course not. Your deductions might be limited, especially if you do not meet the IRS definition of trader.

At-risk rules

The IRS says that your loss is limited by the amount of property you contribute to your investing activities, including money you borrow. In most cases, day trading losses meet the risk definitions, but if you pursue a naked trading strategy that causes you to lose more than your initial investment, you might fall into this category.

Passive activity losses and credits

The IRS defines a passive activity as an investment where the investor does not play an active role but does make money. You can deduct passive activity losses only up to the amount of your passive activity income, and you can use credits from passive activity losses only against tax on the income from passive activities. Day trading is generally considered to be active, because you are materially participating, but if you are generating passive losses from other investment activities, you probably won’t be able to use them to offset your day trading gains.

Interest expense limitations

The IRS allows you to deduct investment interest up to the amount of your net investment income, which is your investment income less all your allowable deductible expenses except for interest. If you lost money trading, you can’t use the interest deduction to reduce your taxes. What you can do, though, is carry the undeducted investment interest into next year, and use it to reduce your taxes on those profits.

You also can’t deduct interest expenses on straddles. A straddle is an options strategy that involves buying both a put option and a call option on the same stock with the same strike price and expiration date. In most cases, the non-deductible interest and related carrying charges are added to the basis of the straddle.

Two-percent limit

If you do not qualify as a trader to the IRS, then you can only deduct investment expenses and other miscellaneous itemized deductions if they add up to more than 2 percent of your adjusted gross income.

Top Secret Tax Information for IRS-Qualified Traders Only

If you meet the IRS qualifications for being a trader, covered earlier, then you can avoid some of the tax headaches faced by people who trade but are not considered by the taxman to be traders. If you trade as your job, make thousands of trades a year, and rarely hold any position for more than a day, then you can fill out something called Form 3115, Application for Change in Accounting Method, and tell the IRS that you want to use the mark-to-market election in calculating your capital gains and losses. This is not an easy form to fill out, so you should have a professional do it for you.

The form has to be submitted with your prior year’s tax return. If you want to use mark-to-market accounting in 2008, for example, you need to submit Form 3115 when you send in your 2007 tax return in April of 2008.

Notice that you can’t use the election in your first year of trading. You first have to prove that you are a trader before you are allowed to get the tax benefits that go with the title. Consider it an apprenticeship.

If you qualify for trader status, you receive two benefits:

  • Mark-to-market accounting
  • Increased expense deductions


Mark-to-market accounting

Under mark-to-market accounting, you no longer have to track capital gains. Instead, you pretend to sell your portfolio at the end of the year and then pretend to repurchase everything at the beginning of the new year so that all capital gains fall into income.

Because day traders usually close all their positions at the end of the day anyway, mark-to-market accounting may not seem like a big deal, but it is: In effect, converting all capital gains to income means that your trades are no longer subject to the wash-sale rule. For most day traders, this means lower taxes and fewer paperwork hassles.

If you use mark-to-market accounting, you can no longer get the 15-percent rate on any long-term capital gains from your trading activities. Unless a day trader is working with listed options, which are considered to show profits that are 60-percent long-term capital gains and 40-percent short-term capital gains, there may not be any long-term capital gains from trading activities.

Greater deductibility of business expenses

In general, the IRS only allows investors to deduct business expenses if they exceed 2 percent of adjusted gross income. However, anyone who gets to join the charmed circle of IRS-qualified traders gets to deduct 100 percent of expenses, regardless of their adjusted gross income. They get to deduct all their investment interest, too.

One caveat, though — the IRS assumes that people are in the business of trading because they are making money at it. If you lose money for three out of five years, even if it’s because your expenses exceeded your investment profits, the IRS will probably kick you out of the club.

Reporting Your Investment Expenses

Many of the differences in income and expenses make more sense when you think about how they are reported on your income tax return. In this section, I give you 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 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. Capital gains and losses from your trading are reported on Schedule D of Form 1040, subject to all the limits on losses.

Paying Taxes All Year

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. Let’s 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. Estimated taxes are paid on Form 1040 ES and are due on April 15, June 15, September 15, and January 15.

Estimated taxes are not due on a nice, even, quarterly schedule. No, it’s a payment schedule that only a bureaucrat could love.

Using Self-Directed Individual Retirement Accounts

Much of the tax hassle associated with day trading is eliminated if you trade through a self-directed Individual Retirement Arrangement, or IRA. Most brokerage firms can set them up for you and handle the necessary paperwork. Although individuals can contribute only $4,000 per year, the money can be substantial for those who have been contributing for a long time. Also, you can roll over money from an employer’s retirement plan, such as a 401(k), into an IRA after you leave.

You don’t have to pay taxes in an IRA until you retire, and then withdrawals are generally treated as ordinary income. This makes them a great vehicle for day traders: You can post big gains, count all your losses, and avoid washsale rules for trading within your IRA. It’s a sweet way to let your profits accumulate and compound for years. Of course, there’s a catch: You can’t sell short, you can’t use all options strategies, and your brokerage firm may not
want to clear funds through the IRA.

Keep in mind, though, that you can’t withdraw money from an IRA account until you turn 591⁄2. If you take money out earlier, you’ll pay a 10-percent tax penalty, and that offsets a lot of the advantages. If you’ll need income from your trading activities to cover your living expenses before then, an IRA is probably not the best way to set up your day trading account.

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