Is the Tax on Trading Profits the Same As on a Paycheck?

Read this to find out how much tax can you expect to pay when you invest in day trading versus long-term trading and how to avoid a big tax build-up.

Filip Dimkovski
By Filip Dimkovski
Edited by Taj Schlebusch

Published May 11, 2021.

Investing in and trading stocks can be a great tool for building wealth, but as the income from your 9 to 5, the money you make is taxable. In the last year, the number of day-traders boomed. They may have made big profits, but here comes the problem, and many traders may be perturbed when they see their tax bill.

If you made money by selling stocks — or another type of “capital” asset, including bonds, real estate, etc. — held for less than a year, then you will pay the short-term capital gains rate, which is the same as your ordinary tax rate and can be up to 37%.

Gains made on stocks held for more than a year, meanwhile, will incur the long-term capital gains tax, which maxes out at 20% but is usually no higher than 15% for most people.

Another problem is when you get bigger gains, combined with your annual income that you may go into your next tax bracket, so you will be taxed more on both your gains and your salary.

With last year's dramatic market, all the ups and downs, many people profited with smart day-trading tactics, but don’t be fooled because that luck isn’t likely to continue indefinitely. I must advise you that, even if you love day-trading, you must look at the long-term, both for investing and avoiding big taxes.