Do you pay the same tax rate on W2 earned income vs short-term capital gains if the amount is equal?

Wait, so if I'm understanding correctly, short-term cap gains actually might be slightly better tax-wise since you don't pay the FICA stuff? How much difference would that actually make on say $70k income?

Yes, that's correct. W2 income is subject to FICA taxes (Social Security at 6.2% up to the wage base limit, which is $168,600 in 2024, and Medicare at 1.45% with no limit). Capital gains income is not subject to these taxes. For $70k in income, the difference would be significant. You'd save about $4,340 in Social Security tax (6.2% of $70k) and about $1,015 in Medicare tax (1.45% of $70k), for a total savings of approximately $5,355 in FICA taxes.

Does this tool actually work with all the major brokerages? I use a few different platforms (Robinhood, Fidelity, and a bit on Webull) and it's a nightmare trying to consolidate everything for tax purposes.

I'm skeptical about these AI tax tools. Can it actually handle complex situations? Like what if you have some long-term gains mixed in with short-term, plus some dividend income and maybe some losses to offset? Does it really understand all the nuances?

Yes, it works with all the major brokerages! I was using both TD Ameritrade and Interactive Brokers, and it handled the imports from both platforms seamlessly. It consolidated everything into one clear tax picture, which saved me hours of manual work. For complex situations, that's actually where it shines the most. I had a mix of short-term and long-term gains, some dividend income, and several loss harvesting trades. The tool broke everything down by tax category and showed me exactly how each type of income would be taxed differently. It even identified some offsetting losses I could use that I hadn't realized were eligible.

How does this actually work? Do they like, call the IRS for you and then somehow transfer the call? I don't understand how a third party can wait on hold for me.

Yeah right. No way they can get you through to the IRS faster than anyone else. The IRS phone system is completely broken. I've tried calling dozens of times about my capital gains reporting issues and never get through. This sounds like a scam to get your money.

They use a system that monitors the IRS hold line for you. When you sign up, they call the IRS and enter the hold queue. Their system stays on hold instead of you having to wait. When an actual IRS agent picks up, their system calls your phone and connects you directly to that agent. It's basically a three-way calling system but automated. It's definitely not a scam. The IRS phone system is indeed broken, which is exactly why this service exists. I was skeptical too until I tried it. I got connected to an actual IRS agent within 3 minutes of receiving their call, after their system had been on hold for about 2 hours. Saved me from wasting an entire afternoon on hold.

I hadn't even thought about the state tax angle! I'm in Illinois - do you know if they treat these income types differently? And what's this about "trader vs investor" status? How do they determine which one you are?

Illinois treats capital gains as regular income, so you should be taxed the same for both income types at the state level. Their flat tax makes it simpler than states with progressive tax brackets. For trader vs. investor status, the IRS looks at factors like trading frequency, average holding periods, time dedicated to trading, and whether you depend on trading income for your livelihood. To qualify as a trader, you typically need to: trade substantially, frequently, and regularly; seek profit from daily market movements rather than dividends or long-term appreciation; and have trading be your primary business activity. The big advantage is you can deduct more expenses directly related to your trading activities and potentially use the mark-to-market accounting method, which avoids wash sale restrictions.

I used TurboTax last year for about 300 trades and it worked fine. Just import your 1099-B directly from your broker instead of entering manually. One thing to watch for is wash sales - sometimes the import doesn't flag them correctly and you need to review those transactions.

This is such a helpful breakdown! I'm in a similar boat switching from W2 to trading income. Quick question about the quarterly payments - if I'm just starting trading this year and don't have last year's trading income to base estimates on, how do I calculate what to pay? Should I base it on my projected income or use my previous year's W2 total tax liability as a safe harbor? Also, when you mention setting aside 25-30%, is that on gross trading profits or net profits after losses? I've had some winning and losing trades, so want to make sure I'm calculating correctly.

Great questions! For quarterly payments in your first year of trading, you have a couple of safe harbor options: 1. **Prior year safe harbor** - Pay 100% of last year's total tax liability (110% if your prior year AGI was over $150k). This protects you from penalties even if you owe more this year. So if your 2023 W2 job resulted in $12k total tax, paying $3k per quarter would keep you penalty-free. 2. **Current year estimate** - Pay 90% of this year's expected tax liability. This requires more guesswork but can save money if your income drops. I'd recommend the prior year safe harbor method for your first year since it's simpler and gives you penalty protection while you learn to estimate trading income. For the 25-30% setting aside, that should be on your **net profits** after losses. So if you made $10k on winners but lost $3k on losers, you'd calculate taxes on the $7k net gain. Keep track of your running total throughout the year - most brokers provide real-time P&L tracking that makes this easier. One more tip: open a separate savings account just for tax payments and transfer money there immediately after profitable trades. It helps avoid the temptation to reinvest money you'll owe to the IRS!

This is brilliant advice about the separate tax account! I wish I had thought of this earlier in my trading journey. I made the same mistake of reinvesting everything and then panicking when estimated payments were due. One thing I'd add - consider setting up automatic transfers if your bank allows it. Some banks let you set up rules where a percentage of deposits automatically goes to a designated savings account. That way you don't even have to remember to manually transfer the tax money after each profitable trade. Also, for anyone tracking their own P&L records, I've found it helpful to use a simple spreadsheet with columns for date, ticker, buy price, sell price, quantity, and net profit/loss. Takes 30 seconds per trade but gives you a clean backup if your broker's records have issues. Plus it makes calculating your running totals much easier for quarterly payment planning.