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You may have to show proof of your income when buying a home, or filing a tax return. In this case, it is necessary to have your income report. If you’re a trader, how can you report your income? In this post, we’ll discuss the ways to report a day trader’s income.
Institutional traders can easily report income as they get this in the form of salary. They can show a salary slip issued by the Firm where they are employed. But for retail traders, there is no set income and set rules.
How to show proof of income as a day trader?
To report day trading income, keep the record of your withdrawal from the trading account. Create a bank account for trading purposes only. Get withdrawals from your trading account twice a week or once a week in that account. Attach the transaction report of this account with your ITR (Income Tax Return).
The money you’re earning in day trading is your passive income, you need to report it legally. In fear of tax, many people try to hide this income. We should acknowledge that day trading income is exempt from tax as it is not included in wages or salary.
How Does a Day Trader Report Income: 3 Ways
There are 3 legal ways to report the income of day traders.
One is to create a bank account and keep all transactions of trading separate from other money. The second is to get an IRS transcript where you would declare yourself as a day trader legally. The third is to report this income in filing an Income Tax report if you are a registered citizen of a particular country.
Let’s check out the details:
1-Keep Trading Transaction Record
If you’re a day trader, create a separate bank account to attach to your trading account. Keep all the records of your withdrawal and deposit money safe in this account. Always deposit money to your broker through this bank account and get a withdrawal from here.
It’s up to you to withdraw twice a week or once a week. If you’re trading with a big sum, it’s important to withdraw twice a week. If you are compounding accounts and don’t withdraw quite often then enlist all of the amounts that you’re redepositing to increase your portfolio.
Nowadays banks issue digital transcripts of any account details with date and time. In this way, it would become easy to calculate your profit, loss, and redeposit amount.
2-Get IRS Transcript
In developed countries, the Internal Revenue Service is responsible for filing taxes and registering income. If you want to declare yourself legally as a day trader, you need to submit an IRS transcript.
It is delivered to you by email or other digital means. To get this transcript immediately you can make a call also. Within 10 days of receiving the call, IRS officials will issue a transcript and you can print it online from the IRS official website. But you need to submit transaction details and slips of your trading account.
3-File Income Tax Return
In developing countries, ITR is an important document. Day traders can declare all of their income whether active or passive in it. But you need to provide proof of your transaction. That’s why it’s important to create a trading account in some bank and keep the transactions separate from your other income.
How Do You Prove You Are a Day Trader
The Financial Industry Regulatory Authority has certain rules to prove you as a day trader. It is the authority that regulates brokerage firms and exchange markets. Its headquarter is located in Washington DC.
FINRA states that when a trader opens four to five trades in a day time frame within five business days, he is regarded as a Day trader.
To prove yourself as a day trade you must be able to trade 5 trades per day and a minimum $1000 balance in your trading account. According to FINRA, the minimum equity requirement in the margin account is $25,000.
Can I Use Day Trading as Income
Yes, day trading is a powerful source of passive income. If you don’t have any income source, you can surely go with day trading. However, it is not counted as wages or salary. It is either investment that may incur both profit and loss.
To be a day trader, you need to have a deposit of more than $1000k in your trading account. Some even recommend equity of $25000 or more in the margin account.
Trading is risky. Pro day traders maintain a proper risk-reward ratio to keep earning a handsome percentage of their balance. They also keep some amount aside in case to reinvest when the account blows off.
Frequently Asked Questions
How do I prove my source of income?
The legal way to prove your income source is salary slip, income record, employer-issued slip, bank statement, employer letter, and Income Tax Return. Other ways to prove your income are social security numbers, disability insurance, pension, or provident fund.
Can a day trader be self-employed?
According to the IRS, day traders are legally self-employed. Day trading is not included in wages or salary. It is a form of passive income that traders make after investing some amount. It is tax-exempt.
How do I verify income if I get paid cash?
If you get the cash you need to get a cash slip from your employer. To verify cash you will have to submit it to the account. Here statement will be created to validate your income record.
It is very rare these days to get cash income. But if you get wages, the chances of getting cash are quite high. To verify if you need to file an Income tax return.
Final Lines
It is easy to make legal proof of your income if you’re a day trader. All you need to do is to register yourself as a day trader in Income Tax Return or IRS. After this attach the proof of withdrawal and deposits of your trading account when reporting income.
It is very hard to transfer black money if you’re living in countries like the USA, Canada, and Uk. You need to have proof of all of your income and bank statements. If you’re a day trader and you haven’t gone through it, you should do it. You need not be afraid of tax as trading income is exempt from taxes.
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