After the dot-com boom in the late 1990s, the practice of day trading seemed to explode. In an effort to safeguard market participants, the likes of Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) enacted the pattern day trader or PDT rule in 2001.
The PDT rule deems that you’re automatically classified as a pattern day trader if you make more than four-day trades in a five-day period from a margin account.
These trades also must make up more than 6% of your total margin trading activity during that time. Under PDT rules, pattern day traders are also required to hold $25,000 in their margin accounts in order to complete more than three-day trades within a five-day period.
- With all this being said, do these PDT rules mean that you need more than $25,000 before you can even begin day trading?
- Does the IRS use the same guidelines as FINRA and the SEC to determine if an individual is a day trader?
- Are there ways to get around pattern day trading rules?
We understand you may have a lot of questions when it comes to the day trading process. Read on to discover more about day trading rules and regulations, learn how the IRS classifies a day trader, strategies to get around pattern day trading rules, and more.
What Does the IRS Consider a Day Trader?
While many individuals dabbling in day trades may consider themselves full-fledged day traders, not all of these individuals would be considered day traders in the eyes of the IRS.
Essentially, for the IRS to consider an individual a day trader, they must meet three specific conditions. These conditions include:
- An individual must seek to profit from daily market movements in the prices of securities and not from dividends or capital appreciation.
- An individual’s activity as a day trader must be substantial.
- An individual must carry on their substantial day trading activity with continuity and regularity.
To help further determine if your trading activity would classify you as a day trader, consider the following:
- What are your typical holding periods for securities bought and sold?
- What are the frequencies and dollar amounts of your trades during the year?
- To what extent do you pursue day trading activity to produce income for a livelihood?
- How much time do you devote to the activity of day trading?
Essentially, if your day trading activities don’t amount to the financial status of a business or primary income source, then the IRS will consider you as an investor and not a trader. Ultimately, there are many rules you must follow and stipulations you must meet to be classified as a trader by the IRS.
Why Do You Need 25k To Day Trade?
Just as there are many rules and regulations you must meet to be classified as a trader by the IRS; there are many guidelines established by the United States government to continually make day trades. One major piece of regulation that all U.S.-based day traders quickly learn about is the pattern day trader or PDT rule.
Essentially, a pattern day trader or PDT is a trader who executes four or more day trades within five business days using the same brokerage account. When a trader makes their fourth-day trade within five business days, their account will be automatically flagged as a PDT by the broker. This PDT status places certain restrictions on further trading from the account.
To continue day trading once your PDT status has been activated, you must maintain at least $25,000 in your margin account at all times. If your account drops below $25,000 for any reason, you will be prohibited from making any further day trades until the balance minimum is restored.
How Do You Get Unlimited Day Trades?
Under the PDT rules established by the Financial Industry Regulatory Authority or FINRA, the only way to gain access to unlimited day trades is by maintaining a minimum of $25,000 in your brokerage account prior to starting day trading on any given day.
In most circumstances, without a minimum balance of $25,000 in your account, you will be limited to making only three-day trades within five business days.
Can I Day Trade With Less Than 25K?
While there are many benefits of day trading with a brokerage account that maintains over $25,000, you don’t necessarily need $25,000 to find success with day trading.
Of course, with less than $25,000 in your account, you will only be able to complete three day trades, all within five business days. While this still allows you to make days trades, it is restrictive and will likely hinder your overall potential as a day trader.
For example, if you make three day trades on a Monday, you would have to wait until the following Monday to continue making day trades. These long waiting periods hinder your overall ability to make the most profits from your day trading endeavors. Luckily, there are ways to get around PDT rules and make significant profits from day trading with less than $25,000.
How To Get Around Pattern Day Trading Rules
While day trading with over $25,000 provides a number of benefits, not everyone has that luxury when getting started in day trading.
The good news is that there are a number of day trading loopholes and alternative trading strategies that will allow you to get around PDT rules as you build up your $25,000 brokerage account.
Some of these alternative strategies are outlined below.
- Make only three day trades in a five day period.
- Open day trading accounts with different brokers.
- Day trade in a stock market outside of the United States.
- Use swing trading and enter trades that you hold for longer than one day.
- Work with a day trader firm.
- Day trade in different markets such as Forex, Futures, or Options.
If you’re serious about getting started with day trading, there are certainly a number of loopholes and alternative strategies you can research and begin implementing as you work your way up to building a $25,000 margin account.
While these alternative strategies will help you get started, to get the most out of day trading and to be able to day trade for a living, you will want to follow PDT rules to get the most benefits and make the biggest profits.
Robinhood Day Trading FAQ
The $25,000 portfolio value day trading requirement is set by FINRA, and all brokerages are required to enforce it, including Robinhood.
Just as all brokerages must, Robinhood has to follow guidelines established by FINRA and the SEC that restrict day trading to three day trades in a five day period for margin accounts with less than $25,000.
Unlike stocks and options, cryptocurrencies are not regulated by FINRA or the SEC. This means Bitcoin and other cryptocurrencies do not count as a day trade on Robinhood, and they don’t have any day trading limits wo which you have to adhere.
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