If you start with 10k, grow it to 100k during the year, and are wiped out back to 10k by the end of the year, are you still responsible for tax on the full 90k you earned, or is it like you didn’t profit at all, so you have no tax implications? also, if you aren’t trading as a “day-trader” but just as someone who trades on the side, does that change the tax implications here? i think i know the answers to these questions, but i would like confirmation. tia.
‘If you start with 10k, grow it to 100k during the year, and are wiped out back to 10k by the end of the year, are you still responsible for tax on the full 90k you earned, or is it like you didn’t profit at all, so you have no tax implications?’ You can net out gains against losses. So essentially you would not owe taxes on the 90k you had at one point. This is otherwise known as a wash. Someone who trades as a hobby would pay short term capital gain taxes. Again, you may deduct losses against gains. You’re financial institution should have provided you with a 1099 to input on the schedule d.
Also, as of 2006, you could deduct up to $3000 of stock losses against your ordinary income. It may have changed in 2007.
you are only taxable on realised gains, remember that, since you didn’t realise that 90K you were up you don’t pay tax on it
so, it’s basically what you finish with at the end of the financial period (read: year) that is taxed. the main reason i ask, is because i didn’t see how people could start with 10k, continue to invest the principal and gains which are taxable, than risk losing it all, and have NOTHING, but be required to pay taxes on what they had at one point…just seems way too risky. that’s good news, it’s one of the last pieces of the puzzle i needed to clarify with my day-trading plans. thanks guys.
one more thing…isn’t the wash just related to p&l in the SAME stock? say you turn $10k into $20k with stock A, then you take the $20k and invest in stock B, and are wiped out back to $10k, would you owe taxes for the $10k gain on A, or would the loss on B just balance it out, so again, no tax implications?
The techinical definition of a wash is the same stock. However if you invest in stock A and double your funds, then move to stock B and lose all of your funds, you would have a net loss at the end of the year to which you would not owe short term capital gains. In this example you could also take up to $3000(I think this is still the threshold) stock loss against your ordinary income.
If you’re going to be trading for a living you really need to talk with someone about tax planning in a much more in depth way than this, especially if you have other investments. First, there are issues of legal structure that can minimize taxes and make it easier to expand into trading other people’s money. This might even include off-shore entities if you have enough money (but you can set up one on the cheap for $5K in BVI, not including the obligatory BVI vacation). There are also complicated tax issues related to futures contracts, swaps, other derivatives, wash sale rules, etc. that need to be explored. You even need to figure out how to avoid paying withholding tax on a quarterly basis (because it’s a pain and diminishes your trading capital). If you are going to remain employed, this adds another dimension. Your return and happiness in life can be just as dependent on some of these choices as how well you do trading (although if you can make 50% per year or something you can be happy with any choices).