Here's an excerpt from an article on taxes on day trading from Smart Money magazine:

DO YOU TRADE STOCKS more often than most people change their socks? Then you need to understand how Uncle Sam views your habit. Otherwise, come April 15, you'll be suddenly confronted with a mountain of paperwork. And those profits? Well, they'll seem a lot smaller once the Internal Revenue Service has taken its share.

There are, however, some strategies that active investors can use to reduce their tax bills — and make life much more pleasant come tax season. Here's what you need to know about them.

Trader vs. Investor

In the world of taxes, "trader" and "investor" each has a special meaning that carries with it some pluses and minuses. Most individuals — even those who trade a few times a week — are, by the IRS's definition, investors. But if you spend your days buying and selling stocks like a hedge fund manager, then you are probably a trader, a title that can save you big bucks at tax time. How? By allowing you to fully deduct all your investing expenses, such as newsletter subscriptions, your home office and your computer equipment.

So what are you, you ask, a trader or an investor? This is one of the fuzziest areas of our fuzzy tax code. "The question is clear; the answer is not," says an IRS spokesman. The only way to define your status is to go by the guidelines laid out in several court cases that have addressed the question.

The courts say you are a trader if:

· You spend lots of time trading. Preferably, you don't have a regular full-time job. (My reading is, you can also be a part-time trader, but you had better be buying and selling a handful of stocks just about every day.)
· You have established a regular and continuous pattern of making lots of trades (several almost every day the markets are open).
· Your goal is to profit from short-term market swings rather than from long-term gains or dividend income.

If you think you qualify and want to know the nitty-gritty of the rules, see More Tax Tips for Day Traders. If you're not so sure, here's how I think these court cases apply to the real world. Say you spend 10 hours a week trading and total about 200 sales a year, all within a few days of your purchase. In my book, you're an investor, not a trader. You are not spending enough time or trading often enough to satisfy the IRS. How about 20 hours a week and 1,000 short-term trades? I think that amount of time and trading gets you there. If you spend 30 hours a week, make 5,000 short-term trades a year and don't have a full-time job, even the IRS should agree without a fight. If you choose, you can actually be both a trader and an investor. You must segregate your long-term holdings by identifying them as such in your records on the day you buy in. Then they won't "taint" your trader status.

For advice that pertains to your particular situation, and many more services exclusively for day traders, trust the day trading tax experts at tradersaccounting.com.