Capital Gains Tax

• If you sell a stock, then buy the same stock later in the day, your only concern is the capital gain tax on the original sale. This tax is based on the price of today's sale, and the original purchase price of the stock. If you held the stock for less than one year and made a profit, you have a short term capital gain. Hold it longer and the gain is long term. Short term capital gains are taxed as ordinary income, while long term gains are taxed at a lower rate. Investment gains and losses are added together on your taxes each year. Net gains are taxed, net losses may be tax deductible.
  
  

Margin Trading

• If you buy a stock and then sell it later that day, you are participating in a short sale. Stock trades take three days to settle, so if you sell something on the same day you buy it, you are selling something you do not actually have in your possession. Brokerage firms call this a margin trade, and you must have a margin account with a line of credit to execute it. Margin accounts allow you to borrow money against your portfolio to cover the cost of short sales. Do this more than a few times a week, and the Financial Industry Regulatory Authority will classify you as a day trader, subjecting you to stringent cash and margin portfolio requirements.
  
  

No Loss Deduction for Day Traders

• If you participate in a lot of short term sales -- buying and selling within a few days or weeks -- you may decide to do day trading as your primary or part-time business so that you can write off losses as a business expense. Unfortunately, day trading losses are typically classified as capital losses rather than business expenses and you cannot deduct more than $3,000 a year annually. If you have a particularly good year, this can result in a very large tax bill.
  
  

Estimated Tax Payments

• If you make enough money from stock trades during the year, either in short or long term gains, you may need to pay estimated income tax or increase your payroll tax withholding to cover your upcoming tax bill. The IRS may penalize you if you do not pay at least 90 percent of your taxes during the year. See IRS Form 1040ES for details on estimated tax payments.