WHEN GOOD INVESTING GOES BAD
report to the IRS the capital gains, dividends, and sale proceeds for all trades and investments the clients hold or did hold at some point throughout the year. For day traders, like other investors, any gains that were made during the year must be claimed on their federal income tax forms. However, because these gains were made on trades where the trader held the stocks for days or other short periods of time, these gains are taxed at the less-favorable short-term capital gains rate, which is the trader’s income tax bracket. So, reverting to our previous example, if John shows an overall capital gain of $5000, he will have to claim that as a short-term capital gain, which will be taxed at his ordinary income tax rate. This means that under the new tax law, this gain could be sub- ject to a maximum tax rate of 38.6 percent. Had he held these stocks longer than one year before he sold them, the gain would be taxed as a long-term capital gain, which is a maximum of 20 percent.
And what happens if the market starts to go down, as it has over the past year? Well, then day traders are pretty much stuck. Their goal is to make money as quickly as possible, not to research compa- nies, then buy and hold those stocks. For the most part, if the market goes down, day traders will sell their stocks for a loss, which could be substantial depending on which stocks they hold.
BUYING ON MARGIN
As a rule, I generally try to dissuade my clients, or anyone, from buy- ing securities on margin (credit). The reason is that it’s just too risky, especially with the way the market has been behaving over the past two years. While I am not going into too much detail about buying on margin, I am saying this. When the market is gaining, buying on mar- gin can be great. However, when the market starts to head south, buy- ing on margin can kill you financially.
This is how margin works. Let’s say you have $200,000 that you want to invest. You would like to invest more money than that, but you only have the $200,000 available right now. You open an account with a brokerage firm, who then approves you for margin trading. (Not everyone can trade on margin—you really do have to be approved.) By law, the brokerage house can loan you up to 50 percent of the total pur- chase price for stocks. So, let’s assume that you would like to purchase