
Day trading–by its very nature–can be a profitable pursuit. The caveat is you must be proficient in the field (and following our day trading tips and insights at Sniper Trades can help with that).
Say you’re breaking into the industry. You’re confident that you’ll be competent. After all, you’re a student of the game who can adapt and evolve as challenges come your way.
In this instance, you’ll be happy to know day trading yields an average income of $116,895 annually. That’s $56 per hour! The top 10% make closer to $200,000, while the bottom 10% earn close to $68,000.
Even if you start slow and are at the bottom 10%, you can earn around the median US income as a day trader.
Again–we’ll reiterate–day trading isn’t a magic bullet profession. You need to be skilled and knowledgeable and committed to developing keen instincts.
Still, you stand to earn a large chunk of change by entering the day trading game with the correct approach. On that note, top day trading pros can earn in the seven-figure region.
How Your Earnings From Day Trading Can Potentially Work Against You.
Do you know the phrase–we think it’s from Spiderman–”With great power comes greater responsibility?”
We want to make an adjustment to that saying: With great earnings comes greater tax burdens. Or, even more to the point, with more money comes more problems.
The purpose of day trading is to make a sizable chunk of coin in relatively short order. Our friends at the IRS aren’t going to let those substantial earnings go unnoticed–they want in on your piece of the pie.
This isn’t an anti-tax rant. It’s merely a matter of fact. You’ve got to pay on what you earn, and–typically–you’ll pay more if you make more.
Let’s examine the tax-related hurdles you’ll face in day trading. Afterward, we’ll assess strategies that can potentially mitigate these expenses and maximize your earnings.
The Complex Relationship Between Day Trading And Taxes.
Those making a profit in day trading face less favorable tax treatment than long-term investors who buy and hold.
By running your day trading as a business and meeting specific IRS requirements, you can be classified as a “trader in securities.” In this instance, you can decrease some tax expenses but may bear the brunt of a self-employment tax.
Often, though, day trading investors don’t operate as businesses. Thus, they’ll face the following tax-related challenges and implications:
- As a day trader, you’re on the hook for taxes on investment gains during the year you sell.
- Capital gains can be offset against capital losses but offset gains can’t exceed losses.
- Up to $3,000 in excess yearly losses can offset ordinary income (e.g., interest, wages, or self-employment income) on a tax return. You can then carry the remaining excess loss to the following year.
- Ordinary income taxes apply to any gains when investments are held for a year or less.
- Holding an investment for a year plus lets traders leverage tax rates for long-term capital gains.
- Dividend and capital gains distributions call for investors to pay taxes during the year both distributions are paid out.
- It’s possible to defer or avoid some tax expenses by keeping investments in a 401(k), Roth IRA, or similarly tax-advantaged accounts.
Familiarizing Yourself With The Capital Gains Tax.
One of the more crucial day trading tips we can give you is to familiarize yourself with the capital gains tax and all its nuances.
Say you sell a stock at $30 that you bought for $15. This means you’ll have $15 in capital gains into which the IRS can sink its teeth.
As we’ve already hinted, the length of time investments are held dictates how the associated capital gains are taxed. These are short and long-term rates. Holding the assets for over a year provides more advantages. Anything held for under a year is taxed as your yearly income.
Short-term capital gains are taxed between 10% and 37% (depending on your tax bracket).
Conversely, long-term capital gains are taxed between 0% and 20%, depending on your income.
Meeting The IRS’s Day Trading Requirements.

The IRS has a precise definition of who’s classified as a day trading professional.
In fact, many people who deem themselves day traders aren’t actually viewed as such by the IRS.
Meeting the IRS’s definition of a trader means that you satisfy these criteria:
- You’re involved in significant trading activities.
- You attempt to profit in daily market movements via securities instead of interest, dividends, or capital appreciation.
- You’re frequently active.
The IRS doesn’t view any forms of buy-and-hold investing as trading.
Instead, traders actively make numerous daily trades. They don’t hold securities for extended periods.
A “trader” tax status is a labor-intensive distinction that can cost you if you’re not careful.
Crucial Day Trading Tips: How To Offset Day Trading Taxes.
You can implement the strategies discussed below to offset some of your day trading tax burdens:
The Market-To-Market Technique.
The market-to-market method allows day trading professionals to diminish capital gains with capital losses. Tax deductions are often available on any investments sold at a loss, which can help reduce the capital gains tax.
Generally, the IRS only allows $3,000 in losses to be deducted. However, traders can deduct more using the market-to-market approach.
If you meet the IRS’s day trading criteria, you can file an election to market your commodities or securities. You can then deduct over $3,000 in losses and apply the new market value at the beginning of each year to the given security’s value.
For all intents and purposes, this approach resets losses or gains to $0.
Market-to-market does have its cons. For example, losses can’t be carried over into the following year. That said, the pros of this approach seem to outweigh the pitfalls.
The Wash-Sale Exemption.
Day traders sometimes sell off assets at a loss to offset their gains. As such, the IRS often won’t allow investors to sell losing investments and repurchase them within 30 days of the sale.
Fortunately, market-to-market exempts you from the above rule. Even if you’ve recently purchased an asset, you can sell it to offset your gains.
Here’s a specific example of how this technique can work for you in day trading:
A day trader can operate on a hunch that a company’s stock will plummet in a couple of days after their quarterly earnings call. Our hypothetical day trader can purchase the stock, sell it when it drops, then write off the loss when filing their taxes.
This strategy has its shortcomings and risks. Still, it can be highly effective when implemented correctly.
Turning Your Day Trading Into A Business.
We discussed this method earlier. Running your day trading pursuits as a business can offset a reasonable percentage of your tax burden, but you’ll face a self-employment tax.
However, many entrepreneurs can leverage their business taxes to mitigate expenses and maximize the associated deductibles’ financial benefits.
You must be ardent in seeking business components to deduct. Find everything possible that falls under the deductible umbrella. Don’t do anything fraudulent but leave no stone unturned in reducing your tax burdens.
Computers, internet service, and day trading software or services are only the tip of the iceberg on what you can deduct. For instance, a designated home office may even allow you to deduct a fraction of your mortgage.
Given the impact these savings can have on your day trading career, discussing business deductibles with a financial advisor would be wise. They can help you develop long-term strategies that prevent the IRS from reaching too far into your pocket.
Do You Have Anything To Worry About By Limiting Your Tax Burdens?
The IRS wants money from you, but they’re not out to get you. You have little to worry about if your trading practices are above board, and you’re diligent about tax-related compliance.
Using the above techniques isn’t “gaming the system” or throwing up red flags for the IRS. These are legitimate strategies used by upstanding, forthright professionals. It’s your right to try to save as much money as possible through legal means.
Explore every avenue to protect your earnings. The IRS won’t hold it against you if your t’s are crossed and i’s are dotted.
Want To Learn More Day Trading Tips? Contact Sniper Trades Today!

Day trading is a complicated pursuit with lots of landmines to navigate–one of those landmines is your taxes.
Avoiding those landmines and navigating your way to a flourishing career requires extensive knowledge. You must remain sharp and on top of your game to maintain a competitive edge in day trading.
Joining the Sniper Trade community grants you access to high-level day trading insights that help fine-tune your skill set. You’ll be part of a community that drives you to perform at your best and lifts your day trading abilities to the next level. Contact us today to discuss our subscription plans.