Are traders only taxed on money that is withdrawn from the account or on all profits that are made? If the tax is charged to all profits made in the account, are there any ways to compound the profits like in a mutual fund but in your own trading account? Thanks
if your trading stocks - you get taxed cap gains - doesn't matter whether or not you withdraw the funds (it matters when you sell). I don't know bout futures because I don't trade them.
Well first of all, I trade full-time so it'd be taxed as income -- my question is why am I able to defer my taxes in my mutual funds (Not IRA) and how could I do that with my trading account.... I'm sure there is a way.
If you sell your mutual fund like you sell your stocks then you have to pay tax on the gains or claim your losses. The gains made in a Mutual Fund by the managers are distributed at year end as Capital Gains Dividends. You cannot defer your gains on your trading account unless it is in an IRA or Retirement Account.
If you want to defer taxes then trade IRA money. All stock sales will be reported to the IRS and you have to compute your gains/losses based on your cost basis. If you're not trading tax deferred money then you'll be liable for taxes on your profits. The reason mutual funds don't pay taxes on all the gains in a given year is that they don't dispose of all stocks in the fund during the year. The pay the distributions to holders based on what they sold during the year and any unrealized gains are not taxed. Even in years where funds decline in value you'll have a distribution as any fund will sell something during the course of a year at a profit. Example: Imagine a mutual fund bought a security in 2003 for $15 a share. At the end of 2006, the security was worth a total of $30 a share, but the fund ended up selling the security in 2007 for only $25 a share. This is a loss for the year, but an overall profit of $10 a share. Another possibility would be for the fund to sell the security for $35 a share, which is a gain even for the most current year, but the rest of the funds holdings went sour and created a losing year for the fund.
If you trade commodities futures, you get taxed at a lower rate. I think it is 60% at regular short term cap gains rate of 35% and the other 40% at long term cap gain rate of 23%. Overall you save 12% from Uncle Sam. You use Form 678 in that case. For stocks you use Schedule D and are taxed at short term cap gain rate of 35%. Mutual funds in an IRA account are of course not taxed because they are deferred until you retire. At that point, you are forced to withdraw a minimum % of your IRA account every year. Mutual funds held in non-IRAs are taxed at either short term or long term cap gain/loss rate depending on how long you held the fund.