Dear Tax Talk, I am a day trader who is trading in the foreign exchange (currency) market. My plan is to day trade for five or six years to make my capital, about $1 million.
Continue Reading Below
Here is my question: Assume that my initial capital is $100,000 and after one year I make another $100,000, so my capital will be $200,000.
But I do not withdraw my profit because my plan is to make $1 million. In such a case, should I pay tax on my $100,000 profit, or can I postpone it to the time that I withdraw the money from my account?
Best regards, -- Kaveh
Dear Kaveh, It sounds like a brilliant plan, but save some money for taxes. As a U.S. citizen or resident, gains realized on currency contracts are recognized and taxed when you close out the trade. There are no deferrals as with real estate like-kind exchanges. The only way you can defer paying taxes on your earnings is if you create a retirement plan or use individual retirement account money to day trade.
If you have the required capital in an IRA, or better yet a Roth IRA, you could set up a self-directed IRA that would allow you to day trade. I suggest a self-directed account, as many traditional IRA custodians probably would not permit a day-traded IRA. For more information, check out Bankrate's article, "Self-directed IRA a good bet?"
If your plan is to do this over the next several years, you might want to consider whether it is possible to create a retirement plan with your business in order to shelter some of the gains. You also might want to get some advice from a certified public accountant on this planning strategy.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.
Copyright 2012, Bankrate Inc.