if i buy a stock of 2 different companies at 10 dollars. 1 goes up to 20 and the other goes down to zero. i then close both positions out. do they cancel each other out and i wouldn't owe any taxes, or do i owe for the gain and i would only be able to deduct from the loss up to 3 grand?
taxes for noobs on losses and gains
- Thread starter happy trading
- Start date
In the USA, your net gain is 0. In the USA, you do not owe taxes on zero. If anything, they should owe you, just for being a citizen of this crazy place lol!
Not an expert, but the first question is short (less than 12 months) or long term capital gains? Tax rate will be different.
Then, stock one is taxed on $10 and the other will show up as a $10 loss in your $3k deduction, as you correctly stated.
I am going to assume that you do not qualify for trader tax status, and that you are not using the mark-to-market election.
Even if you think of yourself as a "day trader," or a "professional trader," or an "active trader," and even if you are subject to the pattern day trader rules in the USA, this does not make you a trader in the eyes of the IRS. Most retail traders in the USA are treated as ordinary investors under federal tax law.
In general, for investors, gains and losses are netted out for the calendar year.
If you have gains of $10,000 and losses of $6,000, you will report a net capital gain of $4,000.
The limitation of $3,000 per year only comes into play when you have a net loss for the year.
If you have gains of $6,000 and losses of $10,000, then you have a net loss of $4,000 for the year. You will be allowed to deduct $3,000 to offset other types of income (such as wages, retirement income, rental income, etc.). The remaining loss--$1,000 in this example--is carried forward to next year. It will be available next year to offset gains or other types of income.
As an additional example: Say you have $10,000 in gains and $20,000 in losses. So you have a net loss of $10K. You take $3K this year, and carry forward $7K in losses to next year. Next year, you have $15K in gains, and $5K in losses, for a net gain of $10K. But you get to apply the $7K carryforward, giving you a net gain for the year of just $3K.
BMK
Even if you think of yourself as a "day trader," or a "professional trader," or an "active trader," and even if you are subject to the pattern day trader rules in the USA, this does not make you a trader in the eyes of the IRS. Most retail traders in the USA are treated as ordinary investors under federal tax law.
In general, for investors, gains and losses are netted out for the calendar year.
If you have gains of $10,000 and losses of $6,000, you will report a net capital gain of $4,000.
The limitation of $3,000 per year only comes into play when you have a net loss for the year.
If you have gains of $6,000 and losses of $10,000, then you have a net loss of $4,000 for the year. You will be allowed to deduct $3,000 to offset other types of income (such as wages, retirement income, rental income, etc.). The remaining loss--$1,000 in this example--is carried forward to next year. It will be available next year to offset gains or other types of income.
As an additional example: Say you have $10,000 in gains and $20,000 in losses. So you have a net loss of $10K. You take $3K this year, and carry forward $7K in losses to next year. Next year, you have $15K in gains, and $5K in losses, for a net gain of $10K. But you get to apply the $7K carryforward, giving you a net gain for the year of just $3K.
BMK
The $3K max is how much you can use to reduce ordinary income, such as wages, IRA distributions, rental income, interest income, etc. There is no limit to how much of the capital loss carryforward can be applied to capital gain.
If you work through a Schedule D manually, you can see that the entire capital loss carryforward from the prior year is available to reduce current year capital gains.
BMK
Since I know you are a CPA, I will ask this question for clarification also...The account told me that you HAVE to carry forward the $3K loss each year, even if you have no gains. You cannot skip a year, like not filing because you don't have to.
Like a use it or lose it policy. So if you have 10K in loss to carry forward...If you do not elect to carry it, then the next year you cannot restart the carry? All those losses have poofed and yer back to square 1?
Yes, you are required to use a capital loss carryforward. To a certain extent. The forms require you to enter the amount, go through some rather detailed calculations, so that you and the IRS can keep track of the loss. So there is a line where you have to enter the full amount of the carryforward each year, and then it is used to reduce current year gains, and then if there is still something left, it is used to reduce other income up to $3K.
But if your income is so low that your income tax would be zero anyway, e.g., all of your income is reduced to zero taxable income by the standard deduction, then there is a step in the formula that allows you to preserve most or all of the loss, and continue to carryforward the entire amount, because in that context, using up $3K would not have any tax benefit for you.
There is a little bit more to it that what I just described, but that is the basic scheme.
I am not a CPA. I am an enrolled agent. CPAs are licensed by a state board, like doctors and lawyers. Enrolled agents are licensed by the US Treasury Department. Both are allowed to practice before the IRS.
BMK
