Taxes and Trading

This time of year, taxes and trading come into play with some people. Hopefully, some of these people realize that just like any other type of financial strategies, taxes require planning as well.

Some people place trades throughout the year and then when tax time rolls around, they hand over documents to their tax preparer and pay the bill to have their return prepared.

If you were running a business, this method would work, but if you spent time looking into different strategies and planning, you may just find a few ways to save some money.

The most important thing is to make sure you have a qualified tax preparer who stays up to date on the tax laws as they change all the time.

I have seen some tax preparers who in my opinion, should not have been preparing anyone's tax returns, especially when it comes to taxes and trading. Most likely, they had just been hired during tax time, taken a 1 or 2 day training class and been put to work.

That may be fine for a simple tax return, but probably not okay for anything more complicated, such as determining whether or not you may qualify and benefit from declaring Trader Status.

As far as places do some of your own research on the subject, here are a few resources I have used in the past to find information that has helped me out with my own taxes and trading:

For those of you who may prepare your own taxes, or at least would like to prepare your own "Schedule D" which lists your trading transactions for Capital Gains purposes, programs like Turbo Tax and others will generally download a minimum number of transactions from your online broker and help you prepare the form.

In some cases, online brokers do not have the info, or the correct info available to download, or in the case of someone who places a large number of trades each year, there will be times when standard Turbo Tax type programs will not work.

For the last few years I have been using a program available online called TradeLog

TradeLog has worked great for me each time. Some years, easily importing over 1000 trades with no problems. The program calculates capital gains and losses, wash sales, single trade performance calculations, annual performance reports and other cool information useful for analyzing.

Some people ask about paying estimated quarterly taxes for trading. In my experience, I have always had other sources of income as well and have always prepared and paid my taxes once a year. Be sure to check with your own accountant as each persons' situation will be different.

If you do pay your taxes for trading once a year but still want to make sure you have the money available come tax time, it is a good idea to calculate your estimates taxes due on a regular basis, such as monthly or quarterly, and put the money in a savings account of some type. This works of course, as long as you have the willpower to leave the money alone.

A starting point on figuring out how much to put away for taxes would be to look at your previous years return and figure out the percentage of income you paid in taxes, and use that same percentage. This will not be 100% accurate, but it will be a base to start with that you can adjust each year as needed.

Lastly, many people get upset when they have to pay taxes. I have always tried to learn as much as I could to help minimize any tax liabilities while realizing that if I owe taxes, it means I made money. If I owed more taxes than in previous years, it meant that I made more money than in previous years (in most cases).

As I mentioned, I have seen many people get upset that they owe money for taxes, or they owe more money than the previous year, or in the previous year they got money back and now they owe money. Think about it in a positive way that you are doing well and making some money. If you get upset about paying taxes, you may not be right for handling your own finances or investments either.

Remember, this information has helped me out over the years but be sure to research yourself and check with your own accountant for your specific situation. Checking for yourself will help you many times over in the long run in most cases.

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