As we are all aware, tax season is now upon us and I am sure everybody could use some relief from the tax man, so what better time to learn about the tax advantages of futures trading!
Most experienced traders may understand the differences between trading stocks versus futures and the benefits each offers depending on the trader’s goals, but very few traders understand the tax differences between the two trading avenues. For short-term traders, you may be interested to know that the tax benefits of futures trading are outstanding!
What are the tax differences of futures over stocks, you ask? While stocks are taxed at the 35% short-term capital gains rate for positions held less than a year, futures are taxed 60/40. This means that while 40% of your gains in futures trading is taxed at the same 35% rate as short-term stock trading, 60% of your gains are taxed at the long-term capital gains rate of 15%! That is a total of 23% (60% x 15% + 40% x 35%) difference in tax rate! Something that is very important to consider when deciding which markets to allocate your capital to!
Any trades are educational examples only. They do not include commissions and fees.
To better visualize the tax advantages of futures trading over stock trading consider the following simplified example of Trader Joe. Trader Joe enjoys day trading silver futures contracts and Apple stock. Trader Joe ends the year with profits equaling $10,000 from his silver trading. In addition to Joe’s silver trading, let’s consider that Joe coincidentally captures profits of $10,000 on his Apple trading. Come tax season, while Joe will be paying $3,500 (35% x $10,000) in taxes on his profits resulting from Apple stock, he will only pay $2,300 [$1,400 = ($4,000 x 35%) + $900 ($6,000 x 15%)] on his profits resulting from silver futures trading. It gives Joe comfort that he has retained more of his profits trading silver futures!
It may also be comforting to know that you are not limited to simply trading commodities in the futures markets, such as gold, oil, and grains, but have access to the stock market as well. The futures markets offer access to all of the major stock index markets including the S&P 500, Nasdaq, and Dow Jones Industrial Average. The futures markets also allow you to choose your leverage using large contracts for the trader with a higher risk tolerance to the beginner interested in minimizing his/her risk with mini contracts. Ultimately, the futures markets offer many avenues and benefits that may fit into your financial goals that you are not even aware of.
To learn more about the tax advantages and the many benefits futures trading offers contact a StoneX broker today.
To learn more about the tax benefits of futures over stocks please speak with your tax consultant.