Day Trading Taxes And Expenses - What Can Or Can't I Deduct?

Day traders operate within a style of trading called day trading and often seek information on on the expenses they can and cannot deduct form their day trading taxes.Some of the services they perform include purchasing and selling items such as futures, options, stocks, currencies, and derivatives in the same trading day in order that all positions will be closed prior to the market closing on that trading day.At the end of each day, Day traders close out their positions and then start the same process all over again the next day. The nature of this process in short-term reduces some risks because it is unlikely big losses will occur overnight. There are expenses associated with day trading. First, an individual will need to purchase computer equipment, pay trading commission expenses, hire accountant services for day trading taxes, and take out research service subscriptions.

Even with all of the expenses that go with the role of a day trader, they are able to deduct a lot of their costs from their day trading taxes. To make the process run smoother, it is easier to keep track of expenses as they incur. This can be done with the use of a spreadsheet, a notebook, or personal finance software.

A day trader can use the Schedule A of Form 1040 to deduct Investment expenses as miscellaneous itemized deductions. However, these expenses must be considered necessary, ordinary, and be used to manage property that produces income, collect or produce income, and be directly associated to the day trade taxes that are produced.

Day Trading Taxes - Allowed Expense Deductions

• Accounting, legal, and clerical fees can be deducted when the services of a lawyer or accountant is used.
  
• Office expenses in the form of rent and related expenses can be deducted on a day traders taxes if the trading is done from an outside office. Home office expenses can be deducted as long as the office is used exclusively for business on a regular basis. (There must be a room that is separate and devotes solely for the purpose of trading).
  
• Business costs such as a dedicated telephone line, business cards, cell phone, business calls, brokerage fees, office supplies and equipment in the form of chairs, desks, computes, and more can be deducted up in the range of $100,000 if they are used for trading more than half of the time, however, the limits change each year. Equipment and services, however, not exclusively used for trading can only partly deducted in proportion to the business use.
  
• Fees paid for advice and counsel concerning investments that produce taxable income can be deducted. This can include items such as newspapers, magazines, books, etc…or advisory investment services paid.
  
• Safe deposit rental from a bank can be deducted if investment related documents are stored there. However, if other personal items are kept in the box, only a portion of the rent can be deducted.
  
• If money is borrowed by the day trader to fund their daily strategy, the investment interest paid on the loans can be deducted as long as it doesn’t come from a home mortgage and as long as the trader is not subject to additional limitations.
  
• State income taxes on the interest income which is exempt from the trader’s federal income tax can be deducted only if the taxes are itemized.
  
• Rental cars, lodging, taxis, airfare, tips, phone bills, and meals for day trading business expenses can be deducted. Fifty percent of the cost of the business meal can be deducted as long it was discussed prior, during, or following the event. It is essential to keep all receipts and helpful to right the purpose of the meal down on the back of the receipt.
  

Day Trading Taxes -  Expense Deductions Not Allowed

• Stockholder meeting expenses in areas such as hotel stays, meals, transportation, and other costs involved in attending the meeting cannot be deducted from a day trading taxes.
  
• The commission that is paid to a broker by the day trader, whether large or small, cannot be deducted from the taxes. However, the commission can be added to cost then subtracted from the proceeds of their trade. If transfer taxes on securities are charged by the state, they are managed the same way commissions are.
  
• Investment seminar expenses cannot be deducted from the taxes of a day trader. However, even though the cost of attending a seminar cannot be deducted, a trader can deduct advisory services and investment counsel costs they incur while attending the investment seminar.

With day trading penny stocks or just any security, it is essential to keep meticulous records of all transactions to take advantage of the tax benefits they qualify for. Good record keeping will also help the day trader avoid unnecessary penalties or an audit. It is best to consult with a tax professional to ensure they are aware of all the expenses they can and cannot deduct from their day trading taxes and that all necessary guidelines are met.