Stock traders that don’t trade professionally might not think of their profits as income, but you won’t be able to convince the IRS of that. Profits from trading are considered capital gains and are included on tax form Schedule D.
If you forget to pay taxes on your trades or hope that you can skip out on capital gains taxes by flying under the radar, you good be setting yourself up for a major headache.
If the IRS discovers that mistakes or omissions on your tax return resulted in underpayment, you will be subject to the late payment penalty of 0.5 percent of the overdue amount for every month the payment is late. In addition, the IRS charges interest on overdue taxes that is compounded daily.
In addition to penalties and interest, if the IRS classifies your omission as negligent, you could end up stuck with the negligence penalty of 20 percent of the overdue amount in addition to the other penalties mentioned above.
Finally, if the IRS determines that you are being intentionally deceptive, you could also be hit with the fraud penalty, which is 75 percent of the amount of the underpayment in addition to the other penalties. In rare cases, taxpayers can even be prosecuted for tax evasion, which includes a penalty of up to $250,000 and 5 years in prison.
In a nutshell, nobody wants to give up…
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