Taxes and Stock Options Trading

Taxes leave a bad taste whenever you talk of financial investment. So, effectively you should choose a financial avenue that will give you relief from taxes. With the right kind of investment and effective tax management you can enrich your booty – and one of the right ways to invest is to trade in stock options. Without any hesitation, it can be said that in the current financial market, stock options are viable money earner because a small amount can be turned into lump sum amount, almost in a jiffy.

Stock Options Tax Laws

IRS or Internal Revenue Service has formulated stock options tax laws, based on which options trader is categorized as hobbyist or a professional trader. IRS dubs a options trader a hobbyist when he/ she does not engage in stock trading in a consistent manner. When a trader engages in stock trading activity on a daily basis he/ she is categorized as a professional trader and is eligible for specific advantages related to tax matters. More specifically, the amount of time determines whether a trader is a hobbyist or a professional. If the comparison of  total number of days available for trading and the number of days traded calculates 45%, then the individual is tagged a professional trader. He also needs to have an established margin account, which is the reservoir of trading funds. In general margin account can typically range from $ 25,000 to $50,000.

The Tax Advantages a Trader Can Get

Under the purview of tax deduction comes investment expenses like setting up home office or purchasing computer equipment and subscriptions to newsletters and investment magazines. Like all other self-employed individual the trader fills up a Schedule C form to allow investment taxes to be deducted. The advantage is that the trader need not pay self-employment tax since capital gains are exempted from taxes.

Trade in Options and Deduct Taxable Income

Tax will not weigh you down if you exercise options because it is RRSP eligible. Now what is RRSP? It is the acronym for Registered Retirement Savings Plan – more specifically, Canadians opt for RRSP bank account in order to keep money gained in stock options trading, which adds on to your general income. Thereby your income comes under the scanner of IRS. By keeping money in such an account people can escape the clutches of taxable income. The aim is to enjoy the saved money post-retirement without caring a damn about income tax. So, take the decision to open such an account because both Call and Put Options along with Covered Call enjoy RRSP eligibility.

Effective tax management has a positive side to it – it helps in the accumulation of wealth  on the basis of long term results. You can leverage stock options as a great investment mode and enjoy all the tax exemptions related to stock options trading. Both in the phase of active professional life and retirement you can reap all monetary benefits related to stock options trading.

Always seek the help of financial consultant if you have confusions and queries related to stock options and trading because they can guide you with the best of stock option trading strategies.