Mysunsai t1_iyejirc wrote on November 30, 2022 at 8:24 PM

Reply to comment by Buttercoins in Back taxes and capital loss questions for an older relative. by Buttercoins

> he would be eligible for up to a $3,000 credit, correct?

No, he would have up to $3000 deduction to ordinary income that year. It has no effect on past years, and would at most bring your taxable income to $0 if your income is super low already… which does not produce negative taxes regardless.

> it was mechanically identical to someone trading with a retirement account

But it was not actually trading in a retirement account.

It is the retirement account that is mechanically similar to this general case, not the other way around. This is the normal way things work.

Retirement accounts are given special privileges (and associated limitations) not afforded to anything else because the government wants to encourage retirement preparations. Nothing else gets special privileges.

Buttercoins OP t1_iyemagl wrote on November 30, 2022 at 8:42 PM

I understand it's a bad position to be in. But, look at it from a spirit of the law perspective: he was using it as a retirement account. He did not draw from the initial gain to his checking account (just as if it had been a retirement account). I know the solution isn't straightforward, I suppose what I'm looking for is the best way to approach the IRS to negotiate this, because the guy is getting screwed and will be quite destitute if he has to liquidate his account to cover the tax implications of one trade.

Mysunsai t1_iyemwh4 wrote on November 30, 2022 at 8:46 PM

The “spirt of the law” is that you can take advantage of specific benefits in exchange for specific restrictions. Taking advantage of the benefits without any of the accompanying restrictions is the opposite of the spirit.

Stock traders don’t generally move money back and forth between checking and brokerage, he’s nothing special.

Buttercoins OP t1_iyeohag wrote on November 30, 2022 at 8:56 PM

I'm saying he acted within all the same bounds as he would have had to, had it been an IRA, and for the same reasons: retirement.