Taxes: Scary Thought

monsee said: "I am all new to investing but just a thought came in my mind. For e.g, in first year, I make 50K gains and 50K loses on my trades and I come out even but tax deduction only allows exemption for 3K so does it mean that I would still have to pay taxes on my 47K profit ??"

monsee said: "Let me clear on paper, I had gains of 50K but I came out even as I had loses too so still have to pay taxes on my profits ??"

buy2gain2 said: "In my opinion the gain or loss is calculated on overall realized gain or loss. so the the overall gain or loss is zero so i think you won't have any issues."

thezster said: "Your profit/loss is based on overall profit/loss. Your maximum loss deduction for a given year is $3000 -but any extra loss above that amount can be carried over into subsequent years with the same $3000/yr. limit."

twksk8 said: "[QUOTE=thezster]Your profit/loss is based on overall profit/loss.[/QUOTE] In other words... If you gain 50k, and lose 50k, your profit/loss = 0... correct?"

thezster said: "YUP - that's right.... Though , there are issues such as wash sales, tax deductions for trading purposes, etc...."

RealEstateTalk said: "yes ofcourse your profit is zero. that's common sense."

DaveinJapan said: "Here's a scary thought a friend pointed out though. Say you have a great year and make a lot of profit in 2006 (say $100,000), and then sink it all into a company you think is FANTASTIC and going to the moon... Then, that company pulls an Enron in early 2007 leaving you broke. Or, for that matter, say the market crashes and you lose 80% of your diversified holdings. You would still owe tax on all that 2006 money with no way to offset it. :signs053: So the moral, I guess, is to make sure you don't carry too much from one year to the next."

twksk8 said: "[QUOTE=RealEstateTalk]yes ofcourse your profit is zero. that's common sense.[/QUOTE] I think the question was about taxable profit... that's what I got from reading the original post... whether you're taxed on final profit or total profit before you take out the loss... does that make sense?"

buy2gain2 said: "[QUOTE=DaveinJapan]Here's a scary thought a friend pointed out though. Say you have a great year and make a lot of profit in 2006 (say $100,000), and then sink it all into a company you think is FANTASTIC and going to the moon... Then, that company pulls an Enron in early 2007 leaving you broke. Or, for that matter, say the market crashes and you lose 80% of your diversified holdings. You would still owe tax on all that 2006 money with no way to offset it. :signs053: So the moral, I guess, is to make sure you don't carry too much from one year to the next.[/QUOTE] This scenario is far fetched but possible. But still the "Realized Profit/Loss" holds true. Your $100,000 profit is realized or unrealized that's what matters."

LongArm said: "Realized/unrealized isn't [B][I]all[/I][/B] that matters. Suppose I make two round-trip trades during the year: I realize a gain of $50k on ABC, and I realize a loss of $50k on XYZ, selling it on December 15. No overall gain, therefore no taxes right? But what if I then buy XYZ on January 8? Now I have a wash sale because I bought XYZ back within 30 days and now I'll have to pay taxes on the entire $50k gain. Of course, that's a simple example and wash sales are usually more complicated and can be a real pain in the a**. What I do to avoid wash sale issues is to avoid trading any stocks in December that I've traded throughout the year. Nice, neat, simple."

buy2gain2 said: "Thanks for the info. I was unaware of anything like this."