Last year I made quite a few trades, but didn’t actually gain, or may have lost a bit of money. I just got a letter from the IRS where they are claiming that I owe them 2400 dollars on stock “gains”. Is this right, or should I be only taxed on my yearly revenue from stocks? What options do I have, as I don’t feel as though I should have to pay taxes on untrue income.
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6 Comments
if you have a 1099B reporting the ‘proceeds’ of your stock trades, if you owe money from gains, you apparently did not report your sales properly
you need to have the purchase date and price of each sale to report either gain or loss
if you in fact to have a loss, reported on Sch D, you are allowed to deduct $3000 a year until they are either overcome by gains or used up
if you have no other income to report, maintain records of your losses, that eventually you may be able to report
Did you include your trades on your taxes for last year? This is what has happened. You bought shares and sold them at a loss. If you do not claim this loss on your taxes, the IRS does not know what price you bought the shares at – they are notified by your broker only of the sale of the shares. Unless you tell the IRS that you lost money, they assume that you bought the shares for zero and charge you taxes on this untrue gain amount.
What you need to do is amend your tax return (form 1040X) and send it in. If all your trades generated short term losses, you will be able to use up to $3,000 of the losses against your ordinary income. You might even get a tax refund.
You don’t owe if you didn’t show a profit, but the sales all get reported to the IRS and they don’t know that some were losses. So if you didn’t report them on a schedule C, then all they have to go on is the sales price so assume that was all profit. Respond to the letter with a corrected schedule D showing ALL of your trades, and you’ll be OK.
Respond to the letter in the time given, don’t just file an amended return.
You made the IRS guess at your cost basis and the IRS never guesses.
When you don’t report sales on your tax return (either by not filing or by filing and not doing the schedule D), the IRS puts down $0. Trading the same money multiple times just makes this worse. You may have invested $5000 and lost $3000, but to the IRS this looks like, say, $16000 in sales and without a cost basis, it looks like all gain.
If you just got a CP 2000 letter (omission of schedule D), find your records, do the schedule D and send it in. If you never replied to the CP 2000 letter, you would need to amend as the IRS would have already changed your tax return.
If you never filed, the IRS will do it for you, just do an original return and send it in..
If you did not report the sale of stock on Schedule D, then the IRS is correct to send the letter. All money received for a stock trade that you do not report on Schedule D is assumed by the IRS to be a “gain” because they cannot tell that you did not actually gain unless you properly report the amount that the stock originally cost you. To avoid paying the tax, you MUST file a properly completed Schedule D on which you report the amount for which you sold the stock, the amount that it originally cost you, and the amount of loss (if applicable).
Did you report each and every sale on Schedule D as required by law? If you didn’t, the IRS gets a report from your brokerage showing each sale. Without a Schedule D, the IRS assumes that you each and every sale was pure profit.
You’ll have to go back and file a 1040X and include a Schedule D with it.