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IRA Financial Blog

Day Trading Capital Punishment – Episode 285

Adam Talks

In this episode of Adam Talks, IRA Financial’s Adam Bergman Esq. discusses the capital gains “punishment” when you day trade, and why you are better off trading with an IRA or Roth IRA.

It’s May, and we’re still talking about taxes. That’s because the tax return deadline was pushed back to May 17 due to COVID-19. If you participate in day trading or have any other capital assets, you do have to worry about the capital gains tax. Of course, if your investments are in a retirement account, such as an IRA or 401(k), you need not worry since taxes are deferred or tax-free in the case of a Roth. If you had a good year with your investments, it’s almost time to pony up some cash for the IRS.

What are Capital Gains?

Essentially, capital gains occurs when you sell an asset. Depending on how long you’ve held that asset, you will be subject to the capital gains tax. Because day trading as become so popular over the last few years, you need to be aware of the taxes due. Taxes are due on any capital asset you have sold, including stocks, real estate, and cryptocurrencies.

If the asset was held for less than twelve months, you are subject to short-term capital gains. These are not subject to the capital gains tax. Instead, the money earned is treated as ordinary income. You will pay taxes based on your personal tax bracket, which can go as high as 37%! On the other hand, if you’ve held the asset for over 12 months, you will be subject to long-term capital gains. This is where that tax comes into play

The amount of tax that you owe is based on your income and can vary from 0% to 20%. If you are single, you pay no capital gains if you earn less than $40,000. If you are married and file jointly, that number is doubled. You will pay 15% if you earn between $40,001 and $441,450 as a single filer and between $80,001 and $496,600 if you file jointly. Once your income is above those thresholds, you will pay 20% in capital gains taxes.

Why Use Retirement Funds?

Day traders use popular sites like Robinhood to invest. While it’s a great option for many, you are limited. You cannot use retirement funds and a generally stuck with the first-in, first-out (FIFO) method when selling. For example, if you bought Tesla stocks at different times of the year, you’re stuck selling the first batch of stocks you bought. This may hinder your tax planning choices.

If you look at the numbers across the markets last year, you’ll see they all made large gains after falling sharply at the beginning of the pandemic. That means, just about everyone will owe taxes if they sold their stocks during the year. You know who doesn’t have to worry about taxes? Anyone who bought and sold using retirement funds!

When you invest with an IRA or 401(k), you don’t need to worry about taxes every year. They’re either deferred (traditional plan) or never taxed again (Roth). That’s why it makes sense to day trade using retirement funds.

What if I Need the Cash?

Some traders are reluctant to use retirement funds since they want access to that money. They don’t want it tied up in retirement accounts. That’s where the Roth comes into play. You can withdraw your Roth IRA contributions at any time, tax- and penalty-free! For example, you contribute $5,000 to a Roth for six years, you have $30,000 at your disposal. Keep in mind, that you cannot withdraw the earnings until you are qualified. If you do, you will get hit with those taxes and penalties.

Day Traders Can Self-Direct Too!

Every retirement account provider will allow you to invest in stocks, bonds and mutual funds. You don’t need a special account to do so. However, if you want to trade with a brokerage account, or look at alternative assets like real estate and cryptos, you need to self-direct your plan. A Self-Directed IRA gives you the freedom to invest in what you want. If you want to day trade, setting up an LLC will give you checkbook control of your funds to trade at your leisure.

Self-employed? The Solo 401(k) is the answer for you. It is the best retirement plan out there. High contributions limits, loan and Roth features and the ability to invest how you want are just some of the benefits. You’re probably already looking at your tax bill for 2020. Using retirement funds to invest will dramatically lower it next year!


Many more Americans are looking to day trading as a way to make money and have some fun. Working with a financial advisor is one way to help you become a better investor. Using retirement funds to invest is the way to lessen your capital gains each year! Lastly, keep in mind that President Biden is looking to increase taxes for the wealthy. If you fall into those higher brackets, it’s imperative to weigh your options now!

As always, we appreciate you taking the time to listen. Check us out on SoundCloud and wherever else you stream your podcasts!


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