How to Start a Stock Trading Business and Claim Tax Deductions

 Becoming a day trader is a career path you can launch from home on your laptop. To claim write-offs as a business, you have to prove day trading is your career, and not just an investing strategy. Anderson Advisors says if you can show the IRS you treat investing as a business, you can claim better tax breaks than if you're just an investor.



Investing As a Business

The IRS says day-trade investing as a business is a different animal than regular investing or occasional day-trading for kicks. The IRS defines investors as those who make their money off dividends, interest or capital appreciation over time; traders make money off the daily fluctuations in stock. To qualify for trader tax status, your day-trading has to be substantial, continuous and regular. An occasional gamble won't cut it.

Mike Gingerich says day trading is a cheap business to start. You can trade from home, as long as you have a computer and a suitable software platform for trading. You'll also need a business brokerage account to make the trades for you. While stocks are an obvious day-trading choice, you can invest in cryptocurrencies or foreign exchange if you know those markets. You need to decide on a trading strategy, including the time of the day when you can squeeze the maximum profit out of market fluctuations.

Trader Tax Status

A regular investor reports the results of stock sales as capital gains or losses. Because they're not in a business, they can only deduct trading expenses if they itemize deductions, and only those expenses that exceed 2 percent of adjusted gross income. There's a limit to how much of a capital loss they can write off if their investments go bad.

As a day trader, investing as a business, you can claim trader tax status and write off standard business expenses. For example, if you have a dedicated space set aside for your home office, you can deduct the related costs. If the room takes up 6 percent of your apartment, for example, you can deduct 6 percent of utilities and rent, plus your desk and desk chair if you bought them for your business. If you take classes or read books to hone your skills, those are a legit business expense.

If you elect taxation under the "mark to market" rules, you get an added advantage: All your gains and losses are ordinary income rather than capital gains. An investor can only write off up to ​$3,000​ against other income, but ordinary business losses don't have that limitation. This only applies to day trading and not any stocks you hold as regular investments.

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