Tax implications for stock day traders

 Game Stop and the Robinhood trading app have been in the news lately. 

As we enter income tax filing season, day traders (People who buy and sell stocks on a daily basis resulting in short term losses and gains) will face the challenges of figuring out their gains and losses and the tax implications of their activities. 

As The Wall Street Journal's tax expert Laura Saunders writes: "Robinhood made the market feel like a game; the IRS hasn't followed suit." one of the day traders that Saunders describes in her article made about $8,000 on his trades last year. His IRS 1099 form summarizing a small portion of his trades is 34 pages long! "It's so convoluted, I have no idea what it means" reported the taxpayer in question. He expects hundreds more pages of tax forms and will have to hire a professional preparer this year. I wonder how much that will cost!

So the next time a friend brags or you read about 20 somethings making big profits in the stock market by day trading, remember the tax consequences and the cost of professional tax preparation. 

Main points: 

• Investment income is taxed very differently from earned income. 
• Long-term vs. short-term capital gains are treated differently
• The tax code allows investors with losses to offset capital gains up to $3,000/year
• Capital losses can't offset gains if the investor buys the same holding within 30 days
• If you've been day trading don't expect to prepare your return yourself; expect to pay a professional preparer a lot of money to deal with hundreds of pages of Form 1099-B.