How to avoid issues with IRS and your Brokerage when day trading penny stocks

A Day Trader is somebody who does four intra-day trades in five consecutive trading days. Let me concentrate on some terms here to help you understand this well:
Intra-day trade:
A trade that is opened and closed in the same trading day (round trip).
Five Consecutive Trading Sessions:
These are calendar or working days when the market is open, all in a row. For example, if the market was open on Monday through Friday that would be five consecutive days. Then we would have Tuesday through Monday for the next five consecutive days (unless Monday was a holiday in which case it would then be Tuesday through Tuesday. Next, we would have Wednesday through Tuesday, and so on. The key is five trading days in a row.
How to avoid it?
One of my friends taught me to use a table to record my intra-day trades. By placing an "X" on the day you do intra-day trades, (2 X's if you do two, 3 X's if you do 3 in that day) you can avoid accidentally getting to four by looking at your calendar. Make sure you mark the days the market is closed on your calendar.
Why it is important?
I considered it mattered a lot, but after my research, it appears there actually are some good benefits being classified as a "Day Trader" assuming the $25,000 is not an issue for you and you plan to keep this ammount on your trading account anyway .

Basically there are two issues at hand:
ISSUE NUMBER ONE: Tax Consequences with the IRS. Actually upon my research into the IRS Articles it does not appear as bad as I thought. A tax firm specializing in day trading activity, says:
o They enable the active trader to still take advantage of the beneficial long term capital gain rules.
o They enable the active trader to circumvent the restrictive "Wash Sale" rules normally applied to investors, thereby alleviating a huge record-keeping nightmare.
o They allow the active trader to deduct losses on open as well as closed positions.
o They allow a full deduction of all trading losses in the year they face, thereby circumventing the historical $3,000 net capital loss rule.
o They allow full actual expensing of trading operating costs without limitation, thereby circumventing the limitation on miscellaneous itemized deductions.

You would report your trader's activity as a business on Schedule C of your 1040, possibly allowing all the deductions for your classes and tools, versus a limitation on deduction for passive trading that would have had to be documented on your Schedule A with a 2% AGI limitation deduction. But here is the sweet deal: you can still elect to report your gain or loss on Schedule D as a capital gain unless you made the mark-to-market election, (which has you claim the income as ordinary income on Form 4797 instead of Schedule D - see IRS Publication 550 for more critical info on this). Just to be safe, you better talk to an accountant that specializes in stock market trading, particularly day trading. Being a certified accountant, I want to tell you that most accountants will not know how to treat your trading income properly, unless they studied it as a separate discipline. Trader needs to understand this.
The proper classification of your investment activities is important to determine how income and expenses are to be recorded.
Traders that purchase and sell securities frequently can report their purchases and sales result in capital gain and loss, and their deductible expenses are trade or business expenses.

ISSUE NUMBER TWO: Account Value - your brokerage firm will likely impose the NASD requirements of maintaining at least $25,000 in your trading account (mentioned above) - and you have 5 days to comply with this requirement. If you have this kind of money there is no issue! However, if you are starting out with limited assets to trade it could be a big issue! One important note - always ask for one time of forgiveness! Many people told me they did and the status was removed - so always ask if in trouble! There may be a way around it, but I am not sure. From my reading of the requirements, the punishment for not complying is that you are subject to cash only trades, (which are what we were doing anyway with options)!

There is a really incredible benefit though if you are labeled a Day Trader and keep the $25,000 minimum value in your trading account. You may be eligible for day-trading margin, which is from 2 to 4 times account buying power. This is my favorite! This buying power may only be used intra-day and may not be preserved past market close. Orders exceeding Day-Trading Buying Power will be rejected. Remember this!