K1s and taxes...

[shadowtrader]

Quote from jwishcamper:

Hi Durango Kid:

The general rule is that net capital losses (after offsetting against your net capital gains) are limited for a noncorporate taxpayer to a $3,000 per year offset against other income. The remainder of the capital loss is carried forward to the next taxable year.

There is an exception if the taxpayer has made the mark-to-market election under Sec. 475. If that election has been made, then the taxpayer no longer has capital gain/loss; rather the income is ordinary gain/loss. In that event, the $3k capital loss limitation rule no longer applies because there is no "capital" loss.

There are some other arcane rules that theoretically come into play that can operate to restrict deductibility: (a) the "at risk" rules of Sec. 465; and (b) the "passive activity loss" rules of Sec. 469. However, these two rules rarely create a problem for traders since most (if not all) traders are indeed "at risk" and are not passive.

Jwishcamper

Do most prop firms report losses on K-1's to their traders? It was my understanding that most keep the losses for themselves, so that the trader does not get to deduct losses. I may be mistaken.

On a related subject, how are losses handled when the prop trader is treated like a independant contractor? Gains are reported on 1099misc, but losses can't be reported that way. Does that mean that the corp or llc gets the benefit of the losses, while the trader gets no write-off?