Many active traders seem to pay little attention to the tax consequences of their short-term gains. They believe that they can make enough money with day and short-term trading to make taxes on gains a nonissue. Long-term traders have always been concerned about capital gains, not wanting to hold stocks less than a year so they will not pay short-term gains on profits. This has always been part of their rationale for not considering more active trading. What can active traders gain from investor’s-mind on this issue?

Depending on what state you live in and your gains from trading and anything else you do that brings in taxable income, you could be taxed as high as 30 to 40 percent between federal and state taxes. This means that you will keep only 60 percent of your profits and that is before you subtract your commission costs and other trading-related expenses.

One way for short-term active traders to trade free of capital gains concerns is to trade in a self-directed retirement account, such as a Keogh. I talk to many longer-term investors who, for whatever reason, simply have not considered this tactic. Obviously, those professional traders who are attempting to make their living from trading will not be able to avail themselves of this strategy. But there are hundreds of thousands of online traders who are fairly active, trading at least a few times per month or more. The size of this group will only grow, as the number of traders who are familiar with online trading and have the right technical tools for short-term trading increases.

It seems apparent that this is the direction we are moving in: more short-term traders utilizing varied short-term approaches and styles; more sophisticated trading tools, knowledge, and training; around-the-clock electronic markets; very low fee to free trading; and larger amounts of savings, retirement, and discretionary income that can be funneled into the market. And, most likely, greater volatility in price moves.

This suggests that larger numbers will become more active traders but choose to trade from a self-directed retirement account. The advantage of trading from a retirement account is that you don’t have to consider short-term capital gains¡ªbecause there are none.

The total worth of your portfolio when you finally retire and are ready to begin distributing it will be taxed as ordinary income at that time. The idea, of course, is that since you would be retired at that time, you will be in a lower tax bracket than you are now and therefore pay fewer taxes on the total value of your holdings. In addition, when you retire, you are not forced to begin to withdraw money from your retirement account.

If you have a Keogh, for example, it can be rolled over into an IRA until you are ready to begin distribution. Those who have independent, self-directed Keogh accounts lose the great benefit of having their contributions matched by their employer, as do those participating in 401-K company plans. But they do enjoy the freedom to trade individual stocks as they see fit. They are not subject to having someone put their money into one fund or another, often with little choice or variety.

Now, conventional conservative thinking was that you didn’t want to take any foolish risks with retirement savings. This has been drummed into almost everyone’s thinking about retirement investing. You wanted to diversify your assets by allocating some to a few growth and value funds, some to a bond fund, maybe a token international fund, and have a chunk in a money-mart fund. You certainly didn’t want to risk losing your retirement capital by putting it into individual securities. This was the common thinking before the birth of the cyber trading revolution.

This is how many financial planners and accountants will advise you today¡ªdon’t take undue risks with retirement money. But the stock market is too hot. There is too much to be made for us to invest by these conservative and out-of-date guidelines¡ªguidelines and thinking that are pre-cyberinvesting savvy and pre-deep-discount brokerages. The whole game changes when you’ve got access to information. All the rules are rewritten when you pay almost nothing or when you get to trade commission-free. How can we not take more risk given the technology, the knowledge, and the know-how? And especially with the glut of baby-boomer savings that have helped create the greatest bull market in history? I mean, you can park your savings and retirement in bond funds or a nice, safe CD if you like.

Better yet, you can put a chunk into an index fund that tracks the S&P 500 and do pretty well. But you are still going to lose between 30 to 50 percent or more to the clever online traders who are gobbling up hot, leading-edge technology and Internet-related stocks as fast as they can be offered up. But you must be willing to handle the downside risk as well.

Remember, you don’t need a whole portfolio of hot, but risky stocks. One or two that bring a great gain can more than make up for some of the positions that earn little or even go down. All it takes is one high flier to bring up one’s total portfolio.

Yes, the risk goes up and you can get whacked if the whole technology sector takes an extended dive. But would you rather be taking that risk with an index fund, or Coke or Disney¡ªnone of which is a sure thing? Or would you like to take a chance with Internet and telecommunications stocks that can double and triple your investment? If you want to take the added risk, you better have the stomach to watch them dive 20 points in an hour or less without woopsing your cookies, as my mother would say.

All of this is to say, trading individual stocks in a retirement account means you can trade as much as you want, make the commission charges almost a nonissue, and not have to give a thought to paying short-term capital gains. In 1999, most of my trades were made in a Keogh account. Of course, I can still lose money. And, unlike a taxable account, I cannot write off losses against gains at any time. But this is a small consideration compared to not having to worry about capital gains. So, if I want to sell CMGI after a 60 percent gain in two weeks, I don’t have to worry about paying the government a big chunk of my gain.

It won’t be long before I am able to trade for free, not worry about paying any taxes on gains, and am using free sophisticated trading software to earn those gains. And this will be possible for ever-increasing numbers of online investors who also have a self-directed retirement account. Perhaps, like me, they will also have a separate taxable account, where they will have to be more considerate of short-term taxable gains. But in order to do it, longer-term investors have to borrow some of the thinking of traders.

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