assumption: Initial capital 10m. 1st year: you are up 1m (11m in account), taxed at, say 20% 2nd year: you are down 1m. Not taxed. 3rd year: up 1m, taxed at 20%. 4th year: down 1m, not taxed. And so on. Eventually, your capital will be less than the 10m initial capital. You can see that you are losing money paying the tax without actually making any profit. Did I understand it correctly? Assuming there's no withdrawal during the period.
When you have a loss in a year, you have a loss carry forward (NOL) to credit against the following years taxes. In your example, you wouldn't pay 20% in year 3.
I suppose that depends on what you have been trading. Since I do futures only, this rule applies to me. If you are trading something other than section 1256, you had better speak with a CPA. Hell, speak with a CPA anyways no matter what you are daytrading. https://www.irs.gov/pub/irs-access/f6781_accessible.pdf
P.S. I never noticed this bit in the instructions of that form... " Collectibles include works of art, rugs, antiques, metals (such as gold, silver, and platinum bullion), gems, stamps, coins, alcoholic beverages, and certain other tangible property." So booze is considered a collectible? Wine collectors have to get involved in some twisted tax scheme just because they hold wine for a few decades? WTF is wrong with the IRS? The IRS code needs an enema!
Does this apply to the following year only? And every time there is a loss in the previous year? Sorry if it's a dumb question, I really don't know much about taxes.