I recently started trading this year, and for the most part have only invested in companies that I plan on keeping for a while. I understand the differences between short-term and long-term positions and how they are taxed ( for the most part anyway), but my question is how is day trading different from flipping?

I would really like to get more involved and start trading more often for the short term, in order to try and make money now instead of holding out for the longer plays. I don't want to buy off margin, I simply want to buy a stock I see a potential uptrend in and then sell it when I feel like it's gotten hot enough for me to make some money on. I've read that you are listed as a day trader when you buy and sell the same stock 3 times within one day, for 3 days within a rolling 5 day period. Would this be an accurate definition or would a closer definition be anyone who buys and sells any stock 3 or more times in a 5 day period?

Also, what would be the best strategy for short-term trading as far as taxes are concerned? is there a rule of thumb most people follow as far as how much you should make on any given stock before you sell ( such as only pulling out when you are up a 100% or more so you have more money in profit then you do taxes?).

Right now I have a full time job, and this would only be a hobby with some of my extra cash, so I'm just seeing if this is worth my time from a tax perspective, or if I should just stick to long positions. ( I live in the US, sorry for not making that clear earlier.)

  • 2
    Must specify a country when asking about taxes. – Chris W. Rea Apr 28 '14 at 1:42
  • Sorry, I have updated the original post stating that I am from the US. – user14777 Apr 28 '14 at 2:34

Flipping usually refers to real-estate transaction: you buy a property, improve/renovate/rehabilitate it and resell it quickly. The distinction between flipper and investor is similar to the distinction between trader and investor, even though the tax code doesn't explicitly refer to house flipping.

Gains on house flipping can be considered as active business gain or passive activity income, which are treated differently: passive income goes on Schedule E and Schedule D, active income goes on Schedule C. The distinction between passive and active is based on the characteristics of the activity (hours you spent on it, among other things).

Trading income can similarly be considered as either passive (Schedule D/E treatment) or active (Schedule C treatment). Here's what the IRS has to say about traders:

Special rules apply if you are a trader in securities, in the business of buying and selling securities for your own account. This is considered a business, even though you do not maintain an inventory and do not have customers. To be engaged in business as a trader in securities, you must meet all of the following conditions:

  • You must seek to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation;
  • Your activity must be substantial; and
  • You must carry on the activity with continuity and regularity.

The following facts and circumstances should be considered in determining if your activity is a securities trading business:

  • Typical holding periods for securities bought and sold;
  • The frequency and dollar amount of your trades during the year;
  • The extent to which you pursue the activity to produce income for a livelihood; and
  • The amount of time you devote to the activity.

If the nature of your trading activities does not qualify as a business, you are considered an investor...

Investor, in this context, means passive income treatment (Schedule D/E). However, even if your income is considered active (Schedule C), stock sale proceeds are not subject to the self-employment tax.

As you can see, there's no specific definition, but the facts and circumstances matter. You may be considered a trader by the IRS, or you may not. You may want to be considered a trader (for example to be able to make a mark-to-market election), or you may not.

You should talk to a professional tax adviser (EA/CPA licensed in your State) for more details and suggestions.

| improve this answer | |
  • Flipping is a generic term that refers to purchasing an asset and selling it in a short period of time. In the financial markets, it is very commonly used to describe the "flipping" of IPO issues. – Bob Baerker Aug 6 at 13:24

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