Life happens.
Sometimes life happens so fast that what we have one day is gone the next. Disability is more common than you might think due to various reasons (military, accidents, genetics, etc.). Becoming a day trader is an attractive profession for a lot of people because it affords the flexibility to set your own pace. No bosses, no vacation requests, just you and the markets.
Stocks, Options, and ETFs are taxed as capital gains and capital losses. Short term capital gains (where most traders would be classified) are taxed at current income tax rates. Capital losses can be used to offset capital gains only and you cannot carry back capital losses. You are limited to $3,000 deduction on capital losses. Any excess loss gets carried forward to the next tax year.
Not sure what a capital gain or capital loss is? Not sure your current income tax bracket? Refer to this post.
Futures Contracts (section 1256 Contracts) are taxed differently than other securities. Regardless of your holding period, Section 1256 contracts are taxed as 60% at long term capital gains rates and 40% at short term capital gains rates. The maximum blended tax rate for futures gains works out to be 26.8% (60% x 20% maximum long term capital gains rate + 40% x 37% maximum short term capital gains rate). This compares very favorable to the maximum short term capital gains rate of 37%.
Foreign Currencies are taxed under IRC Section 988 as ordinary gains and ordinary losses. As such they are taxed at current income tax rates and losses are not subject to the $3,000 capital loss rule.
Not sure what a capital gain or capital loss is? Not sure your current income tax bracket? Refer to this post.
In the ideal scenario, all securities would be taxed exactly the same. Unfortunately the IRS has decided to tax each type of security differently. For newer traders especially, you must understand the tax treatment of the underlying securities you are trading. In a series of blog posts we have put together a brief synopsis of how different types of securities are taxed.