I know this is probably a stupid question, but this is my first year trading with profits in the 10's of thousands. (I've traded for 4 years, but with 4 to 5k, little to no net profits, and not really paying attention to taxes) My question is about the $3000 loss write-off limit. Is this for a deduction of a years net loss, or for total losses? Example; Lets say you have total gains and losses at: $50,000 Gains $20,000 Losses ---------- $30,000 Net Gains Under basic short-term capital gains rates, do you pay taxes on $30,000, or $50,000-$3000(min deduction) = $47,000? If its the latter, that is really screwed up, because theoretically you could owe more in taxes than you made during the year! (make 1mil, loose 900k, pay taxes on 997k???) For some reason I always assumed that it was a deduction of your net yearly loss... But it suddenly dawned on me that I may have been underestimating the evilness of the IRS. I know this question was really dumb, but thanks for any help.
jmcgraw, Ok, first of all, I'm not an accountant, so confirm what I say, but I think you are mixing up a few things. You pay taxes on your net cap gains, ie profits minus losses. Let's assume all are short term to keep things simple. If you have a net cap loss at end of year, then you can deduct up to $3,000 of that against your other income, ie salary, interest, etc. Any excess cap loss over the $3000, you carry it over to the next year. If you have a cap gain, then the issues never arises.
jmcgraw: âMy question is about the $3000 loss write-off limit. Under basic short-term capital gains rates, do you pay taxes on $30,000, $50,000-$3000?â $30,000. The $3000 Capital Loss deduction limit can be applied to other income if your Capital Losses exceed your Capital Gains. Capital Gain is computed by taking the difference between your Cost Basis and the Realized Amount of a sale or more simply your net profit. Capital Losses result from the Cost Basis exceeding the Realized Amount of a sale. Capital Gains and Capital Losses are calculated separately for each year. You may use Capital Losses to offset Capital Gains. If your Capital Losses exceed your Capital Gains then the deduction limit of $3000 can be applied elsewhere as needed. You may carry the surplus, if any, over to the next year. AAA: âIf you have a [net] cap gain, then the issues never arises.â AAA was right from the start and much more succinct. My misunderstanding. I am not an accountant nor do I do prepare my taxes. I believe the info above is accurate, though. [Edit: Iâve rewritten this whole post âcause I was wrong in my original explanation.]
I am lost but from reading the the topic here is what I say. You pay taxes on your net for the year. The 3k is what you are allowed to apply from last years losses to this year. EX; say last year you lost 30k, that was your net for schedule d and you never traded before. You can write off 3k for that year and the next 9 years assuming you dont have any other accumulated losses.
ron2368: âThe 3k is what you are allowed to apply from last years losses to this year.â You can use your Capital Losses from this year to offset your Capital Gains from the same year. Capital Gains and Capital Losses are calculated separately for each year. If your Capital Losses exceed your Capital Gains you may apply the remainder to additional income in the same year. Example: In 1999 Fred had a $4,000 capital gain, and a capital loss of $11,400. He used $4,000 of the capital loss to offset the capital gain: that left a net capital loss of $7,400. He claimed $3,000 of the loss on his 1999 return. The effect was to reduce his taxable income by $3,000. Fred was in the 31% bracket, so the loss decreased his 1999 income tax by $930. The remaining $4,400 of capital loss carried over to his 2000 return. This is not my example but I think it illuminates the issue. To read more about Fred and his trading friends: http://www.fairmark.com/
I may be wrong on this, but it was my understanding that unless you have elected the mark-to-market accounting principle, then you would in fact be liable for capital gains of $50,000. Even if you lost $30,000. Maybe I'm wrong on this, but I think I was reading something about traders who made lots of money in '99, then lost most of it and ended up not being able to pay their tax bill becuase they had not elected mark-to-market.
Check this out. Found it on the web. These accountants specialize in traders especially. www.greencompany.com The best way to avoid taxes may be to move offshore or use offshore banks. I know very little about this but it's worth investigating. Good luck dodging the tax man
Wow, I guess my question wasnt dumb. Looks like nobody really knows the answer. Who could I ask? Preferably without paying a fee.
It is my understanding that you pay taxes on your "net gains", ie profits minus losses. The only limitation is that you only can take $3000 of losses per year. The rest get's rolled over to next tax year. If you elect Mark-to-Market you can take in excess of $3000 of losses per year, provided you have income to subtract it from. [edit]: Active Trader magazine (www.activetradermag.com) has had a very good series by Green (www.greentradertax.com) explaining how it all works with MTM, Schedule C, Schedule D etc.
Schedule D carries over on a net basis. In your above example, you will pay taxes on $30K. The $3,000 amount is the maximum net loss that you can deduct in a given year. However, the remaining loss is carried forward into the next year(s). Example: Year 1     Net Gain $30,000     Pay Taxes on $30,000 Year 2     Net Loss $10,000     Deduct $3,000 (carry forward $7,000) Year 3     Net Gain $10,000     Pay Taxes on $3,000 ($10,000 less $7,000 from prior year) Hope this helps.