Whats the difference between day trading and flipping and their tax implications?

Question

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.)

Answer 1

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.

Answer 2

Flipping is a generic term that refers to purchasing an asset with the intent of selling it for a quick profit in a short period of time. It's most commonly used in regard to short-term real estate transactions and selling IPO shares shortly after they begin trading. You could also use flipping for short term stock trading but it's non specific. It could refer to holding a stock for minutes or days.

Day trading is a specific description. It refers to a round trip made within the same day. You buy a security and sell some or all of it on the same day (or you short a security and buy some or all of it on the same day).

You are labeled a Pattern Day Trader if you make 4 or more day trades (options and equities) in a rolling FIVE business day period in a MARGIN account, provided the number of day trades are more than six percent of the customer's total trading activity for that same five-day period. This rule was implemented in 2001.

A PDT must maintain a minimum equity of $25k on any day that trades are made. It must be in the account prior to the day trading. If the account falls below $25k, the PDT will not be permitted to day trade until the account is restored to the $25k minimum equity level.

If you are lucky enough to become a successful day trader (few do) then ignore taxes. The more money that you make trading, the higher your income will be for the year.