I have a question related to short term stock and stock options trades in the US markets with domestic stocks.
Early in the year I made about 300K in gains on stock and stock options trades. Later in the same year, I had a roughly 500K loss on a series of equity call options trades. ( related to Viacom VIAC stock being flat and expiration ) All the trades were short term and positions were held less than 1 year. Pretty much wiped out my savings at this point. My question relates to the tax consequences. Would I just add up all the short term gains and losses and then consider the net sum of those as the taxable income? If its positive income, then that amount would be taxed? Also, if there was no income because the losses were greater, then would I still face tax payments? I've been assuming that I add up all the short term losses and gains to determine what is taxed. Though, given the large amounts I would like to be sure about it. 🙂 None of the trades were long term. Any suggestions would be appreciated. Just want to be sure I'm not in store for an April nightmare surprise.
You don't add up all the gains and losses and put the net result on your tax return. You have to report the individual sales on your tax return. TurboTax (or whatever tax software you use) will add them all up and calculate the net loss. Up to $3,000 of the loss will be used to offset other income, reducing your taxable income. The remaining loss will be carried over and used to offset income in future years. It's called a capital loss carryover.
So if you don't have any significant capital gains for the rest of this year, the net loss will reduce your tax. You will not pay any tax on the gains that you had earlier in the year, and you will not have an "April nightmare surprise."
assuming you have no open positions which would create wash sales and all your gains and losses are short-term capital gains (with wash sales the holding period of the original shares adds on to the replacement shares and thus can create a long-term holding period ), they would all be netted resulting in a $200,000 Short-Term Capital Loss. if you have no other capital gains or losses the amount you can actually deduct in any one year is limited to $3,000 leaving you with about a $197,000 (or $200,000 if you have no other items of taxable income) in short-term capital loss carryover that can be used in future years to offset capital gains and then any remainder is subject to the $3,000 per year deductible limit,. this $3,000 allowed capital loss (line 7 on Form 1040) can be used to offset any other taxable income on Form 1040 lines 1 thru 6a and line 8.
the total/net of lines 1 through 8 is reduced by adjustments to income and your standard or itemized deductions to arrive at taxable income
oh, and it wouldn't matter if some trades were long-term. your net STCL would offset an equal amount of LTCG. any excess capital losses (long or short-term) are subject to the same $3,000 per year deductible limit.
I have been using Turbo Tax Home Business. I have been importing my trades from Fidelity Investments into Turbo Tax. This has worked well for me the last few years.
Also, in the first quarter, when things were going well, I did pay some estimated taxes of about 20K. I was estimating about 40% taxes on gains at that point and divided it by 4. I was estimating my income bracket at that point. After the trading miscalculation, I stopped paying the estimated taxes.
The play on the VIAC stock was it was down 55% from its high with a 9 p/e ratio at the time. So, I expected a value bounce which did not materialize. The stock moved sideways slightly down. Thus, the calls deteriorated to expiration creating the loss. Memo to self: don't bet the bank on option statistics games and beware of too much institutional ownership in a stock. Lesson learned. The strategy works until it does not.
Thanks again all for the tax information. Sounds good. I'm just going to embrace the suck and move forward on this. Looks like I'll get that 3K deduction for life. 🙂