Most technical analysis traders are active traders. Sometimes making multiple trades in a day, profits are taxed differently than long term gains. Not to mention the fact that commissions can easily add up to tens of thousands of dollars a year for very active traders.
Commissions and taxes are the two things that steal profits right out of the successful trader’s bank account. The more you make, the more you pay and it is a never-ending roller coaster of expenses.
What can be done to prevent costs and fees from ruining the active trader?
Well, commissions are pretty much the cost of doing business. Negotiating with your broker or buying/leasing a seat on the exchange are the only two ways to lower this cost. Remember, the fact that brokers love active traders. They will negotiate with you commission rates if you provide enough volume to them. Never hesitate to ask for lower commissions and always be on the lookout for brokers that will work with you in this regard. Currently, Interactive Brokers remains among the lowest cost retail stock brokers on the planet.
What about taxes?
One of the most common and 100% IRS-approved ways for the active trader to avoid taxes is to trade within an IRA.
Be sure to talk with your accountant or tax adviser before acting on any of this information
Short term gains which are what are produced by active technical day trading are taxed at your regular tax rate. Long term gains on investments held for one year or more are taxed at 20%. However, if you actively trade within your IRA, not only are ALL taxes deferred, you don’t have report any gains or losses. The reason being there is no tax effect on the gains/losses so the IRS doesn’t care what happens.
A Roth IRA is the best tool for active traders to structure trades within. Profits made within the Roth IRA are rarely required by the IRS to be reported. Besides, gains are NEVER taxed if the rules are followed. Basically, you need to hold the Roth for a minimum of 5 years and be over 59 ½ to withdrawal 100% tax free.
Many traders believe that one can only trade on the long side within an IRA. Nothing could be further from the truth. Short selling is permitted under certain guidelines. Not only that but your IRA can be traded with margin to magnify your gains.
The IRS may be the trader’s enemy, but knowing your enemy will lessen the harm in a completely legal and ethical manner.
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