How is a pattern day trader taxed? – TaxScouts (2024)

Are you a pattern day trader or thinking about becoming one? Go you! Although the tax rules for day trading can be pretty confusing. But don’t worry, because we’ve broken it all down for you!

Firstly, what is a pattern day trader?

A trader is someone who buys and sells securities for short-term profit. Securities are shares, bonds, crypto, stocks, etc. And they’re bought under a massive system that we know as the financial market.

Not everyone who trades falls into the pattern day trader category, though. To gain this status you must carry out four or more trades within five trading days. 🗓️

So basically, this ain’t your first rodeo.

What taxes do you have to pay as a pattern day trader?

Again, the tax rules for traders can be pretty confusing so there’s no one-fit answer. But if you’re a pattern day trader, these three taxes might apply to you:

• Income Tax
• National Insurance Contributions
• Capital Gains Tax

Income Tax

If you’re smashing your way through the market and your income exceeds the Personal Allowance of £12,570 per year (in the 2024/25 tax year), you’ll have to pay Income Tax at the following rates:

Many day traders probably don’t have time for other jobs whilst having to constantly monitor the market. But if you do, kudos to you! 🫡

In this case, you’ll have to add all your income together at the end of the tax year. Any income earned as an employee will be taxed automatically through PAYE but you’ll still have to include this on your Self Assessment along with your self-employment income.

If you earn less than £1,000 a year from self-employment, you’ll be entitled to the Trading Allowance. This means you won’t pay tax on anything up to that £1,000. In fact, you won’t even have to report it to HMRC.

National Insurance Contributions

You probably have to pay National Insurance if you fall into any of these two categories:

• You’re self-employed and make a profit of £6,725 or more a year and over £12,570 in a tax year
• You’re an employee earning above £242 a week

Your National Insurance class depends on your individual circ*mstances. For a detailed breakdown, have a look here.

Capital Gains Tax

Capital gains tax (CGT) is due when traders sell their assets and make profit above £3,000 in the 2024/25 tax year (previously halved from £6,000 in the 23/24 tax year).

It doesn’t matter whether you’re self-employed, a part-time or full-time day trader. As long as your gains exceed the threshold, you’ll be liable for capital gains tax.

How much capital gains tax you pay depends on how much you earn, but the two rates are:

• 10% (the basic rate)
• 20% (the higher rate)

How does a pattern day trader pay their taxes?

Many pattern day traders are self-employed. So just like self-employed musicians, hairdressers etc., pattern day traders get to join in the fun of registering for Self Assessment and filing a tax return at the end of the tax year. Woohoo. 🥳

Not all traders work for themselves though. They can also be employed by investment banks, fund managers and stock exchanges. In this case:

• Income is taxed automatically through PAYE (at regular Income Tax rates)
• Capital Gains Tax can be paid using the Real Time Capital Gains Tax Service

Need a 👋 sorting your Self Assessment?

Did we mention? If you’re a pattern day trader, one of our accountants can sort your Self Assessment tax return for you. Because let’s face it, the fluctuating trade market is stressful enough. Taxes don’t have to be too!

Find out more about what we can do for you here.