Day Traders and HFTs (High Frequency Traders) profits are surely short term capital gains which would be taxed at the income rate, but is there some special provision for them, like hedge funds where the manager's fees are taxed at 15%? In fact I suspect that a lot of Day Traders and particularly HFTs are hedge funds.

brucedoe

Day Traders and HFTs (High Frequency Traders) profits are surely short term capital gains which would be taxed at the income rate, but is there some special provision for them, like hedge funds where the manager's fees are taxed at 15%?

No. Unlike hedge fund managers, they haven't scored big and made similar campaign contributions to members of Congress, who write the laws.

There are special provisions that can help "traders." You can read about them in IRS Publication 550.

Phil
Rule Your Retirement Home Fool

like hedge funds where the manager's fees are taxed at 15%?

You are thinking of "carried interest", where manager's get a cut of the capital gains from their managed funds, but don't actually have the investment in the fund.

Day Traders and HFTs (High Frequency Traders) profits are surely short term capital gains which would be taxed at the income rate, but is there some special provision for them, like hedge funds where the manager's fees are taxed at 15%? In fact I suspect that a lot of Day Traders and particularly HFTs are hedge funds.

you're right that trading strategy is independent of firm structure, but i'd venture to say that a lot of the biggest & best high-frequency operations risk their own capital & don't give away the bulk of the profits to outside investors... think GS, getco.

as far as special tax treatment go, sure, for some strategies there is section 1256, which in the right hands is pretty much a boondoggle (60% taxed as LTCG when no position is held overnight).

but the guys who set up the BIG boondoggle (IRS rulings that service partner interests are untaxed upon receipt, and income allocated thereto retains the underlying tax characteristics of the partnership) were actually the venture capital and private equity guys, who get to convert earned income to LTCG. many/most hedge funds generate primarily STCG, which is a bit better than earned income for most investors' purposes, but not such a clear win.

tax considerations are not at the root of your sense that high-frequency traders are screwing you. they ARE screwing you, but in a much more direct fashion. it's the KKRs and TPGs of the world who are screwing you hardest by means of the tax code. it's a bit of a disgrace.

wrjohnston91283

You are correct, I was thinking of carried interest. I consider it unbelievable.

brucedoe