Taxes

Trayder, you are correct, but on year three, you can only write off a $3000.00 loss. Not $7000.00. You can carry losses into the next year, but can only show max. loss of $3000.00 per year.

So on year three you would pay taxes on $7000.00 {$10.000 profit minus max. of $3000.00 loss}

This is the way I have been doing it with my accountant for 3 years. {not that I ever loose. lol.}

 

JMC -

[standard disclaimer - I'm not an accountant, this is not legal advice!]

You can start by going straight to the source: the IRC, start with sec's 1211 and 1212 (skip straight to 1212(b)) at:

http://www.fourmilab.ch/ustax/www/t26-A-1-P-II-1212.html

I will try to explain it: first separate capital gains from income - they have completely different tax treatment. Capital gain is gain from buying and selling anything at different values.

at the end of the year, you owe capital gains taxes on the net capital gain you have made ("realized"). If you make 10 and lose 3 buying and selling capital assets, you owe capital gains on 7. If those are short-term holdings (less than a year) then the rate on those gains is the "ordinary income" rate (ie, what you would pay on your salary if you got a paycheck) You never have to pay taxes on more than the net amount you have gained (well, not in this context!)

if you lose more than you gain, then you have a capital loss. so lets say you make 3 and lose 10, you have a net capital loss of 7. Here's the tax screw-over: although you can PAY an infinite amount of taxes per year, the government won't let you take an infinite amount of losses per year - they limit that.

so, while fair people would say, "I lost a net of 7 capital gains, I should be able to subtract that from whatever other income I have, right?" the IRS says no, you can only offset a max of 3,000 of the net capital loss against other income (eg, a salary) - note the distinction between different types of income - and that the 3000 is a limit applied AFTER you subtract capital gains from capital losses (giving you "net capital losses")

the key is "other income" - its not capital gains, but salary, rents, etc that the 3000 limit applies to. whatever is left over (in this case, the total 7 minus the 3 you offset against salary) is carried forward indefinitely. so next year, if you make a capital gain of 4, you offset the 4 from last year, the net is zero, and you owe no capital gains tax. if you have no capital gains in the next year, again you're limited to 3000, so you offset 3000 of last year's loss against your "other income" and the 1000 you havent taken yet gets carried forward to the next year.


PS: I just did a "preview" of this post, and I realize that it's not very helpful. I'll post it anyway, but it's pathetic we live in a system where just figuring out how much the gov't is going to rob you is so complicated most people can't figure it out....

 

$30,000. Definitely. Always net your REALIZED (not paper)
gains and losses.

This does not apply if you elect to qualify as a professional trader.