Lessons from the Pros

Taxes

# Tax Laws that Could Save You Big Money

About three years ago I received an urgent call to my office. On the other line was Rachel, she sounded like she just discovered a gold mine, or maybe a ticking bomb depending on your perspective.

Rachel had just completed watching our online Core Tax Strategies class that we teach a couple of times a month. The class covers various topics on trader tax laws. She said, “I must have a consultation with you today! It’s urgent!” I replied, “I will gladly meet with you but my first availability is next week.” She said, “You don’t understand, I just found out that my return was filed incorrectly, that I am out of compliance and I can owe a \$10,000 penalty! I need an appointment right away!”

Rachel is married to a physician and their Adjusted Gross Income (AGI) was over \$450,000, putting them at the highest federal tax bracket of 39.6%. Rachel was a beginning forex trader. It turns out that she lost in that year more than \$51,000. Rachel used her husband’s long time CPA, who was a very qualified CPA. The only thing is… he was not well versed in trader tax laws and he missed two important IRS tax regulations.

The first one was that Forex trading losses are part of IRC 988, which means that these losses are considered as ordinary losses that can offset any source of income (ordinary, capital, passive, etc.). Also, unlike capital losses that are limited to only \$3,000 per year, ordinary losses are not limited by amount. Ordinary losses can be claimed at any amount even if it’s millions of dollars.

So, what did her CPA do? He reported the losses on Schedule D. That move cost Rachel over \$20,000! The math is simple \$51,000 * 39.6% = \$20,196.

Now it was clearer to me why she wanted that urgent meeting. We needed to file an amended return and the deadline was fast approaching (the IRS allows to amend a return within 3 years of filing the original return).

So, I cleared my calendar for a next day meeting. We filed an amended return and within 3 months she received a very nice refund plus interest of more than \$21,000. She was happy, her husband was happy, we were happy; the only ones not happy were…. The IRS (LOL).

Now, you are probably asking about that \$10,000 penalty. Well, it turns out that the CPA missed another IRS regulation, “Disclosure of Loss Reportable Transactions” that must be reported on forms 8886 and 8918.  A loss from a foreign currency transaction under Internal Revenue Code section 988 is a loss transaction if the gross amount of the loss is at least \$50,000 in a single tax year for individuals. Rachel lost just a bit over \$50,000 trading Forex so she was subject to this rule and the penalty of \$10,000 for failure to report the transaction by the due date.

We filed a request to abate the penalty and were successful. It was great that Rachel was enrolled in our class and learned about those two tax laws. She received a big refund, stayed in compliance and abated the \$10,000 penalty.

My last word to you? Hire a tax professional that knows trader tax laws and you could also save thousands of dollars in unnecessary taxes.  For more information check our website www.otataxpros.com and ask for your free consultation.

Good Fortunes!

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.