Question 1 - Yes, the losses realized pre Section 475 election will continue to carryover and remain as capital losses. Those capital losses will continue to offset ordinary income up to $3,000.
Questions 2 - Yes that $25,000 loss will carryforward; however, there are other things to consider. My prior post should have included additional information regarding the carryover losses for traders who have made the Section 475 election.
When traders have negative taxable income generated from business losses, which would be the case in your example, Section 475 accounting classifies these losses as net operating loss (NOL) carryovers. Starting in 2018, The Tax Cuts and Jobs Act (TCJA) repealed the two-year NOL carryback, except for certain farming losses and casualty and disaster insurance companies. These TCJA changes mean NOLs are carried forward indefinitely (it was limited to 20 years before the TCJA changes), however, the deduction of NOLs is limited to 80% of the subsequent year’s taxable income.
To use your example, let's say in tax year 2023, the trader had a profitable year and had taxable income of $10,000. That $25,000 NOL from 2022 will carryover to 2023, but the NOL can only offset 80% of the taxable income of $10,000, or $8,000. The remaining NOL will continue to carryover to subsequent years and the deduction will continue to be limited to 80% of taxable income.
@Lucy196
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