I have a FX account and I have put about $20,000 cash into the account. I have had about 4 losing years and last year my account started at about $5,000, a $15,000 loss in the account since I started. This year, my account has risen to $7,000, a $2,000 profit for the year, but still a loss in the account since I opened it. Would I need to pay tax on the $2,000 even though I haven't actually made any money? Please help me understand how losses roll from year to year. Thanks
Do I pay taxes on earnings for the year even if total account is a loss?
- Thread starter tupchurch
- Start date
Have you claimed losses in the previous years? If so, then you should have loss carry-overs to offset your gain from this year.
Assuming you're paying US Federal Income taxes... your losses are "carried over" and deductible @ $3,000/yr. Any gains you have are applied to and offset to your remaining "carried forward loss balance".
So.... between deducting "$3,000/yr" and "profits since your losses", you get to recover the loss tax free or and/write it off partially at $3,000/yr until the loss is "used up".*
Stated another way. If you started with $20,000 and traded it down to $5,000... you have $15,000 which you can either/or/and make up/recover that loss by writing it off or making gains to offset to a total of $15,000 (credit) before any future taxes are due on gains.
*Years ago you could "carry back" losses this year against trading gains in the prior 3 years. But at some point, that "deductible loss" became limited to $3,000/yr.
Example... Let's say, you make $100K one year. Pay taxes on it. Next year, you lose $100K. Used to be you could "carry back" that loss, offset it against last years gains... and recover the taxes you paid last year.... up to 3 years of "carry back". Seems only fair considering that the "line of demarcation" is Dec. 31, and nothing economic. But the way the law stands now... Gains are taxable. Losses may/may not be.
IOW... "If you make a big gain, taxes are due. If you make a large loss, it's only deductibe @ $3,000/yr... or used to offset future gains. Stated another way.... YET ANOTHER HOSE IN THE TAX SYSTEM!!
So.... between deducting "$3,000/yr" and "profits since your losses", you get to recover the loss tax free or and/write it off partially at $3,000/yr until the loss is "used up".*
Stated another way. If you started with $20,000 and traded it down to $5,000... you have $15,000 which you can either/or/and make up/recover that loss by writing it off or making gains to offset to a total of $15,000 (credit) before any future taxes are due on gains.
*Years ago you could "carry back" losses this year against trading gains in the prior 3 years. But at some point, that "deductible loss" became limited to $3,000/yr.
Example... Let's say, you make $100K one year. Pay taxes on it. Next year, you lose $100K. Used to be you could "carry back" that loss, offset it against last years gains... and recover the taxes you paid last year.... up to 3 years of "carry back". Seems only fair considering that the "line of demarcation" is Dec. 31, and nothing economic. But the way the law stands now... Gains are taxable. Losses may/may not be.
IOW... "If you make a big gain, taxes are due. If you make a large loss, it's only deductibe @ $3,000/yr... or used to offset future gains. Stated another way.... YET ANOTHER HOSE IN THE TAX SYSTEM!!
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be serious. get an accountant and/ or read up on the subject. ET is not the place to get tax advice. furthermore you offer little information as to your total income etc. or the state you live in.
ET is not the place to get tax advice. be forewarned.
Be serious, this section is called Taxes and Accounting, so you must be trolling. Sounds like I don't need to worry about taxes in this scenario, so I will save my time and money.
If you're down only 25% in four years, you're probably a top-decile retail forex trader.
"He who loses his money the slowest is the winner (relative)?
zdreg is correct. Just because this section is called Taxes and accounting, doesn't mean he's trolling by offering you sage advice. You must speak to a CPA to figure out where you currently are in the IRS's eyes, assuming you are a US tax-filer.
You need to get a handle on the whole carry-forward, carry-back loss situation, because if you suddenly make $50,000 in profit this year, you're REALLY going to want to get the most out of your previous years' losses.
It's worth the few hundred dollars per year to consult with/have a CPA file your taxes. Even if your year is a total loss, you're gonna' want to file.
Trust me on that.
Or, spend $40 on Turbo Tax instead.