IRS Realizes I'm not that good a Day Trader
This is the followup to my previous post IRS Declares me one of the top Day Traders in History
In that post, I tell about my (futile) discussion with the IRS where they claim that I made a profit of over $2,500,000 on a $30,000 account. At the time I had no clue how the IRS got such an idea, but after doing some research I understand how it happened.
Evidently there are 2 tax forms that your stockbroker issues. The first form itemizes every trade that you made, the profit or loss on each trade, and at the very end the total profit or loss for the year on all the trades. You might assume this very long form would pretty much provide what you need to pay your taxes, but they produce a second form also. The second form is very short and contains basically one number, which is the sum of cost of the securities of every trade you made. For example suppose you bought 500 shares of a stock at 42.80 per share, that's $21,400. Then you sold all 500 shares at a small loss for 42.10 per share, that's $21,050. So for your first round trip that's over $42,000. Now suppose this is is an average size trade for you and make 200 trades for the year, then the number on the form would be over $8,400,000. Impressive for bragging rights, but having absolutely nothing to do with how much money you made (or lost).
Now here's the punchline. I surmisedthat in my case the IRS had gotten the second form from my broker, but NOT the first. So I sent them that form.
As the weeks went by I was fully expecting a personal letter from the IRS thanking me for my cooperation and complimenting me for being such fine American. To my surprise I received a form letter instructing me to send them $112 in back taxes, plus $9 interest.
In that post, I tell about my (futile) discussion with the IRS where they claim that I made a profit of over $2,500,000 on a $30,000 account. At the time I had no clue how the IRS got such an idea, but after doing some research I understand how it happened.
Evidently there are 2 tax forms that your stockbroker issues. The first form itemizes every trade that you made, the profit or loss on each trade, and at the very end the total profit or loss for the year on all the trades. You might assume this very long form would pretty much provide what you need to pay your taxes, but they produce a second form also. The second form is very short and contains basically one number, which is the sum of cost of the securities of every trade you made. For example suppose you bought 500 shares of a stock at 42.80 per share, that's $21,400. Then you sold all 500 shares at a small loss for 42.10 per share, that's $21,050. So for your first round trip that's over $42,000. Now suppose this is is an average size trade for you and make 200 trades for the year, then the number on the form would be over $8,400,000. Impressive for bragging rights, but having absolutely nothing to do with how much money you made (or lost).
Now here's the punchline. I surmisedthat in my case the IRS had gotten the second form from my broker, but NOT the first. So I sent them that form.
As the weeks went by I was fully expecting a personal letter from the IRS thanking me for my cooperation and complimenting me for being such fine American. To my surprise I received a form letter instructing me to send them $112 in back taxes, plus $9 interest.
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