Home > The Business of Trading > Taxes and Accounting > Do I pay taxes on earnings for the year even if total account is a loss?

Do I pay taxes on earnings for the year even if total account is a loss?

  1. I have a FX account and I have put about $20,000 cash into the account. I have had about 4 losing years and last year my account started at about $5,000, a $15,000 loss in the account since I started. This year, my account has risen to $7,000, a $2,000 profit for the year, but still a loss in the account since I opened it. Would I need to pay tax on the $2,000 even though I haven't actually made any money? Please help me understand how losses roll from year to year. Thanks
     
  2. Have you claimed losses in the previous years? If so, then you should have loss carry-overs to offset your gain from this year.
     
  3. No, I have never filed anything concerning that account in the past. I was thinking I don't need to until I actually have more in the account then I have put into it.
     
  4. Assuming you're paying US Federal Income taxes... your losses are "carried over" and deductible @ $3,000/yr. Any gains you have are applied to and offset to your remaining "carried forward loss balance".

    So.... between deducting "$3,000/yr" and "profits since your losses", you get to recover the loss tax free or and/write it off partially at $3,000/yr until the loss is "used up".*

    Stated another way. If you started with $20,000 and traded it down to $5,000... you have $15,000 which you can either/or/and make up/recover that loss by writing it off or making gains to offset to a total of $15,000 (credit) before any future taxes are due on gains.

    *Years ago you could "carry back" losses this year against trading gains in the prior 3 years. But at some point, that "deductible loss" became limited to $3,000/yr.

    Example... Let's say, you make $100K one year. Pay taxes on it. Next year, you lose $100K. Used to be you could "carry back" that loss, offset it against last years gains... and recover the taxes you paid last year.... up to 3 years of "carry back". Seems only fair considering that the "line of demarcation" is Dec. 31, and nothing economic. But the way the law stands now... Gains are taxable. Losses may/may not be.

    IOW... "If you make a big gain, taxes are due. If you make a large loss, it's only deductibe @ $3,000/yr... or used to offset future gains. Stated another way.... YET ANOTHER HOSE IN THE TAX SYSTEM!!
     
  5. be serious. get an accountant and/ or read up on the subject. ET is not the place to get tax advice. furthermore you offer little information as to your total income etc. or the state you live in.

    ET is not the place to get tax advice. be forewarned.
     
  6. Be serious, this section is called Taxes and Accounting, so you must be trolling. Sounds like I don't need to worry about taxes in this scenario, so I will save my time and money.
     
  7. If you're down only 25% in four years, you're probably a top-decile retail forex trader.
     
  8. "He who loses his money the slowest is the winner (relative)?
     
  9. zdreg is correct. Just because this section is called Taxes and accounting, doesn't mean he's trolling by offering you sage advice. You must speak to a CPA to figure out where you currently are in the IRS's eyes, assuming you are a US tax-filer.

    You need to get a handle on the whole carry-forward, carry-back loss situation, because if you suddenly make $50,000 in profit this year, you're REALLY going to want to get the most out of your previous years' losses.

    It's worth the few hundred dollars per year to consult with/have a CPA file your taxes. Even if your year is a total loss, you're gonna' want to file.

    Trust me on that.
     
  10. Or, spend $40 on Turbo Tax instead.
     
  11. To me I'd rather have the CPA's signature on the forms, because if I screw up I am fully liable. If the CPA screws up, there's some leeway on the audit trail.

    Also, with the CPA you can ask questions and get answers right away. I would trust them more than Intuit's help line. Not to mention, some of these older crusty accountants know little bits that software doesn't that can help you save a bit more.
     
  12. I never understood why you could only claim $3000 in losses a year! Surprised that didn't change with the new tax reform....lower the corporate tax rate for huge corporations from 35% to 21% but not increase the deductible from $3000 ... I know it's comparing apples to oranges but they should have increased that deductible.
     
  13. If zdreg had simply suggested seeking a professional then that would be valid, but he was dismissive and condescending as you can tell from his comments. I don't believe I ever said I wasn't going to seek a professional. I simply wanted to know the basic implications of year to year profit and loss from trading. If he didn't want to offer any insight then he should not have commented.
     
  14. Excellent points. Thanks
     
  15. You're fully responsible for your return as-filed, no matter what. But I agree it's worth the $ to use a good preparer.
     
  16. Should have... but it's yet another way to screw certain taxpayers.
     
  17. Maybe because the personal exemption has doubled? Just a blind guess.
     
  18. Not really a concern. "Significant IRS actions" (meaning they did more than just sent you a letter) are generally not about "mistakes in calculations". Unless you're intent on committing fraud, there's nothing to worry about.

    You won't have any real problem from the IRS unless you "intentionally take large deductions of which you are not entitled", or "significantly and intentionally undereport income". If you're not doing either of those, make it easy on yourself.
     
  19. That's not exactly what I meant...

    I meant subtly that if the IRS audits me because of a mistake the CPA made, I have options available to me to assure the CPA pays a bit also. Teehee.
     
  20. If you make an error about "loss carry forward" or "wash sale deductions"... the IRS will just send you a letter explaining it. Then if you wish, you can dispute and refute what's in the letter. Eventually it will be "settled by mail." The end result will be the same whether a high-priced CPA is involved in the process or not.

    (Instead of spending your money on a CPA, buy a 12-pack and a burrito... any left over, donate to an animal shelter.)
     
  21. Then you've created a problem for yourself. You should have been filing the loss each year, which would have likely created a carry-over to this year, and possibly even for a few more years.

    It's possible that you can file amended returns for previous years. But you'll need to address that with a qualified accountant. Then you'll need to balance the cost of the amended returns with any potential savings for this year, and going forward.

    The lessons here are (1) stop trading forex, and (2) report your losses.
     
  22. Agreed, but a quality preparer is the best value-for-money I spend all year.
    Yes, possibly. But there's a dangerous myth out there that you can "blame" your CPA for errors on your return.
     
  23. You "fear" too much.
     
  24. Yes, there's a 3-year carry-back provision somewhere in there, thus the need for a CPA.
     
  25. Highly unlikely, though you apparently don't realize it.
     
  26. To each his own. Audits are a real nuisance. There are 99 better uses of one's brainpower.
     
  27. It is worth it for peace-of-mind?
     
  28. Might be for those who have elected "trader status"... but if memory serves, that eliminates the possibility of any gains being taxes at long term capital gains rates.

    Somebody please correct this if wrong.
     
  29. Not to me. I've been audited a couple of times. Not something to legitimately fear unless you're trying to "get away with something".

    The last time I had my taxes done by a CPA it cost $500+. I queried, "is your software just Turbo Tax on steroids"? He said yes. Not worth it to have him do it.
     
  30. Ahh! But is trading FX the same as trading futures, which eliminates the "trader status" rule and can the section 1256 rule be invoked? CPA time!
     
  31. Oh BLAH, just make an extra $500 trade this year then! lol!
     
  32. That's the excuse my wife makes when she wants to spend more.

    :)
     
  33. It's ridiculous. To have the CPA "do" your taxes, you have to look over everything and be sure you have all of the forms. Then, he "enters the data you collected" and charges you a bundle. How stupid is that? The "effort" and "time" is in getting it all together.

    So... if the CPA enters the data, costs you $500. If YOU enter the data (takes what, 30 minutes?) it cost you $40?

    DUH! (You can buy LOTS of burritos for $460.)

    Not my business. Spend your $$$ the way you want. Just saying...
     
  34. It takes a lot less time and effort to just make a $500 trade to pay for it. After all, we're profitable traders, yes? And it is better to spend the extra $460 on a CPA than burritos if you have a spouse. *think gaseous anomalies*

    Hehe, ok, we are just getting silly now. I think the OP has enough opining here to make his own choice. Peace out Scat, see you in the next thread. :)
     
  35. I mentioned that before on here too. It's not fair, but it's what the system needs to survive. If everyone sold out in 2008, then tax revenues would have collapsed and the Fed would have had to print even more money to fill the gap. So then fine...how about only having to pay capital gains on $3000 / year? Let the rest of the gains carry-over and get taxed the next year? That would be fair. On the bright side, at least the government lets you keep more of your money if you hold it for a longer period of time. And they let you keep all of some of your money once you have paid a one-time tax on that money if it's in a ROTH IRA...at least for now until they change the rules.
     
  36. Well, "we're all profitable traders"... So why not spend $200,000 on a platinum Rolex? Same argument.... but that's not really the subject of this thread.
     
  37. Correct. If you realized your losses on or before December 31, they are effectively deductible against gains. If after December 31, they are not.

    The government "caught onto this" and came to the conclusion that "all big gains will be taxed", but certain "big losses" will not be deductible.
     
  38. There's definitely some truth in that, but my Fed and state returns are many, many pages long. Largely my own fault, because of some deals I got involved in over the years that are still untangling. But I would rather spend the $2k/year than try to keep all that paperwork straight. I'm not a detail guy.
     
  39. I'm kind of surprised no one mentioned it yet here, (...amateurs,)

    There's a loophole, or way, to skirt that $3000/year maximum loss deduction...in a little something called Trader Tax Status, and selecting Section 475 mark-to-market for accounting.
    (further look into it yourself for all the exact details.) o_O

    If you trade full-time, you do it in significant amounts all day, then you're technically defined as a professional trader. And you can deduct All of your losses againsts your gains.
    This is only for US tax law though. You mentioned Forex, most forex traders are international people.
     
  40. *sighs* Yes, it was mentioned LL...

    https://www.elitetrader.com/et/thre...-account-is-a-loss.317737/page-3#post-4596799

    The OP did not indicate whether or not he was section 1256. If so, tax-trader status does not apply.

    Taxes are part art, part science, and part skulduggery!
     
  41. Yes but you can't retroactively select 475.
     
  42. "Sounds like I don't need to worry about taxes."
    you got it right: sounds like. that doesn't make it a slam dunk.

    "so you must be trolling."
    I made a mild reply and you snapped back.
    that kind of behavior doesn't forebode a successful trading future

    lots of luck.
     
  43. Yes, thanks for the information, it was definitely helpful.
     
  44. My brain is telling me that if this is just FX trading, these could possibly be classified as ordinary income and can be reported on Form A, Line 21. In that case (and assuming these were closed out currency trades), you needed to report your loss in the year you had it. You might need to amend your returns from previous years. And there is a deadline to do this.