Trading taxes can be complicated. Understanding the basics can save you money and avoid problems with the IRS. Here is what traders need to know.
Disclaimer
This is general information, not tax advice. Consult a qualified tax professional for your specific situation.
Capital Gains Basics
When you sell an investment for more than you paid, you have a capital gain. When you sell for less, you have a capital loss.
- Short-term gains: Held less than 1 year. Taxed as ordinary income.
- Long-term gains: Held more than 1 year. Lower tax rates (0%, 15%, or 20%).
Key insight: Holding investments for over a year can significantly reduce your tax bill through lower long-term capital gains rates.
The Wash Sale Rule
You cannot claim a loss if you buy substantially identical securities within 30 days before or after the sale.
- Applies to stocks, options, and ETFs
- 30 days before and after the sale (61-day window)
- Loss is added to cost basis of new shares
- Common trap for active traders
Tax-Loss Harvesting
Selling losing positions to offset gains:
- Losses offset gains dollar for dollar
- Excess losses offset up to $3,000 of ordinary income
- Remaining losses carry forward to future years
- Watch out for wash sales when harvesting
Options Taxation
- Buying options: Gain/loss when sold or expired
- Selling options: Premium is income when option expires worthless
- Assignment: Affects cost basis of stock received/sold
- Options can complicate wash sale tracking
Record Keeping
Track for every trade:
- Date bought and sold
- Cost basis (what you paid)
- Proceeds (what you sold for)
- Gain or loss
- Short-term or long-term
Tax-Efficient Strategies
- Hold winners for over a year when possible
- Harvest losses strategically
- Consider tax-advantaged accounts (IRA, 401k)
- Track cost basis carefully
- Be aware of wash sale rules
Track Cost Basis Automatically
Pro Trader Dashboard tracks your cost basis and gains/losses across all positions.
Summary
Understanding trading taxes helps you keep more of your gains. Hold over a year for lower rates when possible. Use tax-loss harvesting strategically but watch for wash sales. Keep detailed records. Consider working with a tax professional who understands trading.
Learn more: why to track trades and creating a trading plan.