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In principle, day trading is like any

other business in which inventory is

purchased at a lower price and sold at

a higher price (i.e., buy low, sell high).

he proliferation of retail trading has brought expensive alternative that charges commissions
challenges as well as new opportunities for for enhanced services. In making commission-free
Taccountants. Because the tax rules surrounding trading available, these financial institutions see an
day trading can be murky and complex, clients who opportunity to profit from extending margin loans
day-trade as either a primary or secondary source of to their trading clients. About the
income may require the services of a tax professional. In principle, day trading is like any other authors
One important area in which this steadily growing business in which inventory is purchased at a lower Joseph Hargadon,
group of clients may need advice is whether to make price and sold at a higher price (i.e., buy low, sell CPA, CGMA, Ph.D.,
a Sec. 475 mark-to-market election. high). One difference, though, is that in the finan- is a professor of
In this article, we offer some thoughts on day cial space, both a purchase and sale can be executed accounting; Irfan
trading from a tax planning perspective. Practical instantaneously, generating quick profits or losses. Safdar, Ph.D., is an
examples are provided to illustrate the tax differ- With the increased accessibility of day trading, associate professor
ence between making the Sec. 475 election versus training courses to educate anyone interested in of accounting;
not making the election. how to trade financial assets have proliferated on Stephanie
the internet. Wendling, CPA,
THE POPULARITY OF DAY TRADING Just like with any business, trading in financial MS Taxation &
Day trading typically refers to active trading by assets requires investment in equipment (e.g., Financial Planning,
retail or proprietary traders who take short-term hardware and software) and the payment of is a senior lecturer;
positions in any of a broad class of financial assets, regular expenses including commissions, platform and Eunbin
including traditional stocks, bonds, currencies fees, data fees, interest on margin-based loans, and Whang, Ph.D., is an
(including virtual currency), commodities, futures, office expenses. Profit or loss from day trading has assistant professor
and, increasingly, options on these assets. Positions tax implications for the trader’s other income- of accounting,
are typically held for as little as a few seconds generating activities. all at Widener
(known as scalp trading) up to several days (known University in
as swing trading). The day trader’s intent, of course, TRADER IN SECURITIES Chester, Pa.
is to buy an asset for a low price and sell it at a Typically, a day trader, because of the nature and
higher price within a short time frame (in the case extent of the trading activities, will for federal tax
of a long position; a short position does the same in purposes qualify as a trader in securities (i.e., an
the opposite order). individual who is in the business of buying and sell-
An increasing number of online brokers provide ing securities for his or her own account). If a day
software and platforms for day traders, who can trader is considered a trader in securities, he or she
use margin loans from the brokerage to increase can make the Sec. 475(f) mark-to-market election
their buying power to sometimes three to four (discussed below).
times their own equity capital. With the recent However, an individual will not be considered a
advent of Robinhood, one of the first online trading trader in securities simply because the individual calls
platforms to allow its retail clients to place trades himself or herself a trader or day trader or engages in
with $0 commissions, day trading became accessible a limited amount of trading activity, regardless of its
globally to the general population. The popularity of nature. To be considered a trader in securities, rather
this pursuit has driven several traditional banks and than an investor, an individual must:
brokerages to follow suit and offer commission-free ■ Seek to profit from daily market movements in
trading to their retail clients in addition to a more the prices of securities and not from dividends,

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