I have been trading for more than four years while holding my day job. Sadly, I racked up big losses. Those losses kept mounting without any profits to deduct them from. Every year, so far, I can deduct only $3000 of those carried-over losses. The trouble is, my losses are so big. If I can only deduct $3000 per year, they might outlast my lifetime! I started to win big this year. It seems to be unfair that Uncle Sam wants to bite a big chunk of my profits in the form of taxes this year while refusing to help relieving my old losses. Do you have any idea how I can get a fairer treatment in this issue? Is there any way that I can speed up the carry-over reduction for my losses? -- Mike Urich
You can deduct an unlimited amount of net trading losses against your net gains. It's only when your losses exceed your gains that the $3000 limitation comes into play.
So if you have big gains this year, now's the time to take advantage of your carry-forward losses. If you have, say, $100,000 in net gains this year and $90,000 in net losses carried forwarded, you can use all of those carry-forward losses to offset this year's gains.
Keep in mind, though, that your capital gains net out against your capital losses in a particular order. Short-term gains and losses are reported separately from long-term gains and losses on
-- Capital Gains and Losses
. Each type is netted independently. Only then is the net long-term number combined with the net short-term number to create a final capital gain/loss total.
If you have a net loss, you can use only up to $3000 of that loss to offset ordinary income. Any amount above that must be carried forward and can be used in future years.
When you carry a loss to future years, it remains either long-term or short-term. This is mostly a paperwork issue. Ultimately, it won't affect how much you can use to offset gains in future years. But be sure to fill out the worksheet on page 6 of the Schedule D instructions.
Roth Conversion Speed-Up
I converted my traditional IRA to a Roth IRA in 1998 and elected to spread the taxable income over four years. I took one-fourth of this conversion in 1998 and I would like to take the remaining three-fourths of it on my 1999 return. Can I do this or do I have to continue to take one-fourth of it for 1999-2001? -- Kevin Allen
You are stuck with that 25% annual payment.
Some background: Generally, you contribute pretax dollars to a traditional IRA and after tax-dollars to a Roth IRA. So you must pay tax on the earnings and contributions in your traditional IRA before rolling them into a Roth.
When Roth IRAs were introduced in 1998, you had no choice but to pay tax on the rollover amount over four years. Congress eventually decided to give you the option to pay tax on the entire amount the year you make the rollover, and for a short period of time you could choose between the two methods. The option of paying the taxes over four years is no longer available for rollovers made after Dec. 31, 1998.
But once you opted for that four-year payment plan, there's no going back.
Big Chatty Thanks
Thanks to all who joined trader, tax specialist Ted Tesser and me for a Yahoo! chat on March 22. In case you missed it, here's the
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TSC Tax Forum aims to provide general tax information. It cannot and does not attempt to provide individual tax advice. All readers are urged to consult with an accountant as needed about their individual circumstances.