Day trading is a short-term trading strategy that has grown massively in popularity in recent years. A large influx of retail investors has taken up day trading on brokerages like Robinhood in hopes of making a fast profit. Recently, things like 0DTE or 0 Days to Expiry options have been the current financial flavour of the week. But did you know there are some repercussions to being an active trader? What happens if I’m flagged as a day trader?

Being flagged as a day trader can have some implications for your brokerage account. In the United States, there is something called the Pattern Day Trading rule. If you place more than four trades within a 5-day window, your brokerage account can be restricted for up to 90 days. 

The Pattern Day Trading rule is not a blanket restriction on your account. There are some ways around it which we will go into a little later. The most important thing to take away is that you can be flagged for being a day trader and in the United States, it can have a direct impact on your account. 

What Happens if I’m Flagged as a Day Trader?

If you are flagged as a day trader, the brokerage can limit your trading activity for up to 90 days. One way around this is to have an account balance of at least $25,000. This $25,000 must be maintained at all times if you want to continue day trading. If you do not have $25,000 by the end of the business day, you can be restricted in the next session.

This might not seem like a big deal but you might be surprised at how many traders do not have $25,000. If you are a new trader, you might not have built up your account to those levels yet. On the flip side, if you are a day trader by career, you might be constantly withdrawing funds to pay for your expenses. 

If you do not want to get flagged as a Pattern Day Trader in the United States, make sure your balance is always above that $25,000 threshold. It might take some time to get there, but once you do you can day trade freely without fear of having your account restricted. 

What Happens if You Violate the Day Trading Rule?

If you do violate the day trading rule you can have your account shut down for 90 days. This means you cannot make any day trades. Most brokerages will allow you to make liquidating trades which means you can sell stocks. This is especially important if you need to get your balance back to $25,000!

On the rarest of occasions, a brokerage can even shut your account down. This isn’t really used very often for obvious reasons. For most brokerages, it is in their best interest to have you using your account and making trades. 

The general rule of thumb for most brokerages is that if you violate the day trading rules once, you will be given a pass. It is easy to lose count of the number of trades you make so most brokerages are lenient. But if you continue to violate the rule you can expect some fairly swift repercussions. 

For Financial Geek’s Canadian Readers: 6 Things You Need to Know About Day Trading in a TFSA

Is There a Way to Get Around Day Trading Restrictions?

Yes! As mentioned, the best way to get around the restrictions is to have an account balance of at least $25,000. Using a cash account also helps as well. When you start day trading with margin, there is a higher chance of falling below the threshold. You could also have a negative balance if you are using a lot of margin to trade.

Another way to get around day trading restrictions is to trade futures. Most people will only think to trade stocks or options. Futures contracts are a way to access the market without worrying about being flagged as a day trader. Whether that appeals to you or not is another thing altogether. 

Finally, you can day trade options in a cash account without being flagged as a day trader. Just remember to keep a high cash balance in case some trades don’t go your way. Options can be a great way to trade the market without having a lot of initial capital. I recommend doing some trading in a practice account first before trading options with your hard-earned money. 

Related Financial Geek Article: How Hard is Day Trading? How Does One Become a Day Trader?

How Much are Taxes on Day Trading?

Here is another thing you have to take into consideration: taxes. As you probably know, there are short-term capital gains and long-term capital gains. If you day trade actively, you are obviously going to be taxed at the short-term capital gains rate. This can make a massive difference to your total gains.

In 2023, the short-term capital gains tax rate can be as high as 37% depending on your tax bracket. Meanwhile, long-term capital gains taxes can be as low as 0% if you hold your position for more than a year. It’s pretty clear which strategy is better for your account balance over the long run. 

There is also the argument that you can make a lot more in a short period of time while day trading, even with the higher tax rates. I’ll leave this up to your own personal risk tolerance and investment goals. 

The Bottom Line: What Happens if I am Flagged as a Day Trader?

In the United States, being flagged as a day trader can have some direct implications for your account. If you are flagged as a Pattern Day Trader, the brokerage can shut down your account for up to 90 days and even close your account in extreme examples. You can get around this by using a cash account with a balance of more than $25,000. This is the easiest way to avoid being flagged as a day trader!

Thanks for reading this today! I hope it helped!

Geek, out.