I'm new to trading and I have a question on how profits are taxed for someone without trader status. I understand these traders can only deduct up to $3k in losses and are taxed on their gains however appropriate for futures, stocks etc. Here's my question: Say a trader has a profitable trade on Monday and makes $5k. However on Wednesday, using that additional capital in his account, he makes other trades and he loses the $5k he made earlier in the week. Is he going to be taxed for that money at years end though he no longer has it, or does the IRS simply look at the bottom line? In other words, does the IRS simply add up all the profit he has left in the account at tax time and tax that, or do they hold Joe trader responsible for every dollar made along the way, whether or not he's lost it in subsequent trades. The above scenario wouldn't involve withdrawing funds from the account or getting checks from his broker. Thanks guys.
In short, IRS looks for the bottom line, so if you made $3K and then lost $3K, you actually do not pay any tax.
It is not exactly an add all the gains, subtract all the losses exercise. There is the Wash Sale rule: Wash Sales You cannot deduct losses from sales or trades of stock or securities in a wash sale. A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you: * Buy substantially identical stock or securities, * Acquire substantially identical stock or securities in a fully taxable trade, or * Acquire a contract or option to buy substantially identical stock or securities. If your loss was disallowed because of the wash sale rules, add the disallowed loss to the cost of the new stock or securities. The result is your basis in the new stock or securities. This adjustment postpones the loss deduction until the disposition of the new stock or securities. For more information, see Wash Sales, in chapter 4 of IRS Publication 550. Futures follow their own set of rules. Jack