The year 2002 was my first year day trading and I just 'dabbled' in it. My losses were not all that great (many would say "Gee, I lost that much in a single day/hour/etc.", but I did have a loss for the year (haven't done the math for exact figure yet, but losses are probably in the $2500-$3500 range). From May thru Sep. I traded one to six round trips per day, all equities, all 100 or 200 shares. Some weeks I would trade 5 days a week, some weeks only two or three times a week, sometimes go 3 or 4 weeks with no trades. Never overnights, always flat by end of day. In October I switched to E-minis, same regularity/irregularity as before. During this entire time I had a regular 'W2' job. I just read this handy topic that seems to cover the basics. My overall tax approach is to reduce hassle and avoid 'red flags'... and I'll not spend lots of tax prep hours chasing $1 savings on taxes, unless I am in a situation where I have to meet certain criteria in order to obtain/maintain a certain status (e.g. full-time, trading-as-my-livelyhood -vs- part-time dabbler as I am right now). So, some pointed questions: 1) I don't see any reason to persue 'trader status' as far as the IRS goes, right? My thinking: Wait until you are making some decent $$$ to transition to this step. 2) As a 'casual trader' can I deduct anything other than the trades themselves (profit/loss)? 3) Since 2002 was a 'losing year', am I even required to bother reporting any trading activity at all? 4) In light of #3 above, what if 2003 ends up being a profitable year with more income and increased trading activity... if I don't report losses for 2002, can I go back and file an ammended return for 2002 when it comes time to do 2003 taxes? Experts to the front please! Thanks, Mr. Toad p.s. I don't mind seeking the advice of a 'tax professional', but I want to at least have a basic understanding of what is a correct approach- I am unwilling to spend large sums of money for totally bogus tax advice.
I have the same questions. My understanding of some of these tax issues is as follows: - right now only $3K is deductible as losses; any more than that is carried over to the next tax year. - to qualify as a full-time trader, you aren't supposed to have any other business or W2 income. - there are certain expenses that are allowed (books? software?) even if one is a casual trader. Any other insights out there? Cheers,
You need to report your trades. The IRS will receive records of sales proceeds from your broker for your SSN. I'm sure you would get an automatic letter from the IRS in several months time asking you to explain why they show gross proceeds of X and you are reporting nothing. And since the losses are deductible up to $3000, with any remainder used to offset gains in 2003 or again deducted up to $3000, why wouldn't you want to report it? Your immediate savings is $3000 x incremental tax rate. I'm not up on "trader" status as others so won't get into it but it doesn't seem worthwhile for you at this time.
Generally, only corporations (even then, subject to certain exceptions) are allowed to carryback capital losses (3 taxable years preceding the loss). Individuals may only carry capital losses forward (see I.R.C. §1212(b)).
If you have a w-2 job which you are at during market hours, you may have a difficult time with trader status. If the w-2 job is after the market closes then you are able to devote your time and energy solely on the market during trading hours. Later, Cracked
If you don't add funds to the account, and don't withdraw anything and are flat at the turn of the year, can you just report the change in the account $$ size for tax purposes? It's already net of fees, commissions etc and should match what IRS gets. Having to itemize each trade and separate commissions and fees would be a pain... Any way to avoid it?
I did not realize the IRS might get bugged about me not reporting losses... so I'll do things 'right'. Thanks for the tips gang!
Unfortunately the IRS requires every individual trade to be itemized on Schedule D (or an attachment to the schedule). The gross proceeds will need to tie to your brokerage statements.
In actual practice, you just have to have the data available if they request it. I always include a note that I made thousands of trades and will send the data upon request. This makes em happy as long as I include 1099's. Personally, I don't think they have the manpower to look over the data anyway. BTW, I am not a CPA, but my accountant believed that this was an acceptable method. Jay