Tax Implications For Day Trading

Q: I have a question. If I have x dollars in my brokerage account and during the day, I buy, say, x*1000 dollars worth of stock, am I responsible for any taxes on this excess that I've "borrowed?" That is, if I zero out at the day's end, I know I'm responsible for the gains tax (31%), but how about the "virtual money" that I held during the day?

A: I've often wondered about the same
thing, needlessly, I think.
It seems that there's only one time
of year you really tally up your
taxable capitol gains, and that would
be December 31st at the end of the
year. Even if you make a thousand
trades during the year, at the end,
you simply measure your gains
against your losses and pay

tax on
the remaining gains. At least I think
this is how it works. If traders had
to pay tax on everything they ever
owned I don't suppose anyone would
be trading stocks.
In addition, taxes on profits from
stock owned, but not sold through
the end of the year carry over to the
next year, it seems.


This works only if: a) all trades are short term AND b) if you
still have a position in the stock on Dec 31 (or within 30 days
after) and you never had a loss on a sale.

If you had a loss on a sale you could have a wash sale, and cannot
just add up all buys and sells.


Furthermore, while your suggestion of adding up all buys and sells
is practical, and will probably work, it is not sanctioned by the
IRS. They sanction adding up all buiys associated with one
particular sale, but not adding up all sales for that stock.


For trading in ordinary equity issues of stock (as contrasted
with certain contracts) - and assuming no constructive sale
positions (if you sell short stock you hold long) -- your paper
gain is ignored for tax purposed. Only when you actually sell
is there a taxable event.

You can own a stock for umpteen years, and it might grow and grow
each year, but if you don't sell it, no tax. If you die there's
never any capital gains to pay on it.


Or if you own appreciated stock held over 12 months you can give
it to charity and itemize that charitible deduction (within
percentage limits) and still never pay capital gains tax.