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bsantos2489
Level 1

Do I have to pay self employment taxes being a stock trader?

Hey!

I am a new stock trader in the trading world. I know I have to pay short term capital gain taxes being a day trader. However, since I am not providing any services for someone expect investing my own money in stocks do I have to pay the 15.3% self employment tax on my gains. That is stock trading is my only income.

Thanks!

1 Best answer

Accepted Solutions
Opus 17
Level 15

Do I have to pay self employment taxes being a stock trader?


@Anonymous wrote:

even if day trading is your only occupation, your earnings are not considered to be earned income. This means that day traders, whether classified for tax purposes as investors or traders, don’t have to pay the self-employment tax on their trading income.


That's not automatically true.  It depends on the facts and circumstances.  See this article.

 

https://www.irs.gov/taxtopics/tc429

 

If you are self-employed, you pay SE tax on your net profit, but you can deduct your investment costs.  If you are a casual trader, you don't pay SE tax but you can't deduct your costs.  (The miscellaneous itemized deduction that included investment costs was eliminated as part of tax reform in 2018.)

 

There are also some answers here, although the threads are long, complicated and old (the 2019 dates are not correct due to a software glitch).

 

https://ttlc.intuit.com/community/business-taxes/discussion/will-turbo-tax-work-if-i-am-a-full-time-trader-in-commodities-self-employed-formed-a-sole/00/59103

 

https://ttlc.intuit.com/community/retirement/discussion/i-am-a-day-trader-how-exactly-do-i-report-my-investment-income-50-000-in-losses-actually-into/00/33582/page/3

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*

View solution in original post

4 Replies
Anonymous
Not applicable

Do I have to pay self employment taxes being a stock trader?

even if day trading is your only occupation, your earnings are not considered to be earned income. This means that day traders, whether classified for tax purposes as investors or traders, don’t have to pay the self-employment tax on their trading income. Isn’t that great?  Maybe not. 

The problem is that if you don’t have earned income, you aren’t paying into Social Security, which means that you might not be eligible for retirement benefits. To collect benefits, you have to have paid in 40 credits, and you can earn a maximum of four credits per year. Most employees do this easily, but if you have taken time off work or have a long history of work as an independent investor, you may not have paid enough in.

Opus 17
Level 15

Do I have to pay self employment taxes being a stock trader?


@Anonymous wrote:

even if day trading is your only occupation, your earnings are not considered to be earned income. This means that day traders, whether classified for tax purposes as investors or traders, don’t have to pay the self-employment tax on their trading income.


That's not automatically true.  It depends on the facts and circumstances.  See this article.

 

https://www.irs.gov/taxtopics/tc429

 

If you are self-employed, you pay SE tax on your net profit, but you can deduct your investment costs.  If you are a casual trader, you don't pay SE tax but you can't deduct your costs.  (The miscellaneous itemized deduction that included investment costs was eliminated as part of tax reform in 2018.)

 

There are also some answers here, although the threads are long, complicated and old (the 2019 dates are not correct due to a software glitch).

 

https://ttlc.intuit.com/community/business-taxes/discussion/will-turbo-tax-work-if-i-am-a-full-time-trader-in-commodities-self-employed-formed-a-sole/00/59103

 

https://ttlc.intuit.com/community/retirement/discussion/i-am-a-day-trader-how-exactly-do-i-report-my-investment-income-50-000-in-losses-actually-into/00/33582/page/3

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*

View solution in original post

Carl
Level 15

Do I have to pay self employment taxes being a stock trader?

As a day trader you are not "self-employed". You're simply investing; be it long term or short term investing. You won't be reporting anything concerning your trading activities on SCH C at all.

tagteam
Level 15

Do I have to pay self employment taxes being a stock trader?


@Carl wrote:

As a day trader you are not "self-employed". You're simply investing; be it long term or short term investing. You won't be reporting anything concerning your trading activities on SCH C at all.


The quoted verbiage above is essentially inaccurate @Carl; you clearly did not read the material in the link to the IRS topic that @Opus 17 provided in his answer.

 

Traders

Special rules apply if you're a trader in securities, in the business of buying and selling securities for your own account. The law considers this to be a business, even though a trader doesn't maintain an inventory and doesn't have customers. To be engaged in business as a trader in securities, you must meet all of the following conditions:

  • You must seek to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation;
  • Your activity must be substantial; and
  • You must carry on the activity with continuity and regularity.

The following facts and circumstances should be considered in determining if your activity is a securities trading business:

  • Typical holding periods for securities bought and sold;
  • The frequency and dollar amount of your trades during the year;
  • The extent to which you pursue the activity to produce income for a livelihood; and
  • The amount of time you devote to the activity.

If the nature of your trading activities doesn't qualify as a business, you're considered an investor and not a trader. It doesn't matter whether you call yourself a trader or a day trader, you're an investor. A taxpayer may be a trader in some securities and may hold other securities for investment. The special rules for traders don't apply to those securities held for investment. A trader must keep detailed records to distinguish the securities held for investment from the securities in the trading business. The securities held for investment must be identified as such in the trader's records on the day he or she acquires them (for example, by holding them in a separate brokerage account).

 

Traders report their business expenses on Schedule C (Form 1040 or 1040-SR), Profit or Loss From Business (Sole Proprietorship) (PDF). Commissions and other costs of acquiring or disposing of securities aren't deductible but must be used to figure gain or loss upon disposition of the securities. See Topic No. 703, Basis of Assets. Gains and losses from selling securities from being a trader aren't subject to self-employment tax.

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