“The “penalty” for day trading is that capital gains are taxed at higher income tax rates for assets held for less than 12 months. I suspect most day traders don’t make a heck of a lot of money when all is said and done.”
That’s not how the math works. Day traders can make a lot of money. They don’t pay the taxes as they make every trade.
The math is the math. A day trader may not pay taxes every time they execute a trade, but the taxes will eventually have to be paid at some point.
If I buy $10,000 worth of Amazon shares and then sell it later when the value reaches $15,000, I have a capital gain of $5,000 to report on my tax return. If I held the asset for more than a year I'm paying at a long-term capital gains tax rate of 20% in the highest tax bracket. If I held it for less than a year, I'm paying an ordinary income tax rate on the gain -- which could be as high as 35% in 2020.
When you add in the cost of the transactions themselves (brokerage fees and commissions), the actual gain shrinks even further.