Back taxes and capital loss questions for an older relative.

Submitted by Buttercoins t3_z8u4kk in personalfinance

Good morning,

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I know I need to facilitate a meeting with a CPA for a close relative, but I want to know if my instincts are right here and that meeting with a CPA will be fruitful. This close relative is older/retired, has minimal income and has long invested small amounts into equities through a normal, not tax advantaged brokerage account. In 2021, he sold a lot of Tesla stock and generated enormous cap gains ($70k+ in taxes owed). He didn't understand that he created a taxable event, never withdrew that money, and reinvested in another stock without paying taxes, and that new stock position is now down ~80%. He could sell the other stocks but that would just barely cover his owed taxes, leaving him with almost nothing. On top of this, Medicare sent him a letter stating that his income adjustment for 2021 will be almost $400 more per month.

What can be done here? My thoughts are that if he can explain the financial hardship to the IRS and get payments on the back taxes delayed, when he shows capital losses in 2022 (by realizing the big loss on current stocks), those losses will offset the owed taxes. Am I correct here? If so, we can also request a case review with Medicare to explain that he never actually had any income, this was all just a couple of trades that are now underwater.

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Mysunsai t1_iye8mqd wrote

> My thoughts are that if he can explain the financial hardship to the IRS and get payments on the back taxes delayed,

He may be able to get on a payment plan, sure.

> when he shows capital losses in 2022 (by realizing the big loss on current stocks), those losses will offset the owed taxes.

Losses in 2022 do not reduce taxes for any previous year.

> If so, we can also request a case review with Medicare to explain that he never actually had any income, this was all just a couple of trades that are now underwater.

He did actually have income. He then spent that income on new stuff, but if spending your income meant it didn’t exist then nobody would ever have any income.

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Buttercoins OP t1_iyehd4k wrote

Thank you for the response. Allow me to elaborate on my line of thinking: assuming that my uncle can show sufficient hardship (he absolutely can), and the payment he agrees to is small, and the following tax year (2022) he shows an equal and offsetting capital loss of say the same amount ($70,000), he would be eligible for up to a $3,000 credit, correct? Well, say the payment plan is $3,000/year, and the credit is $3,000/year, wouldn't the IRS be interested in just washing his liability?

Also, as far as the income goes, this is only counted as income, it was mechanically identical to someone trading with a retirement account (which granted, he should have been doing). Due to his own ignorance, he didn't have his savings in a retirement account.

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Mysunsai t1_iyejirc wrote

> 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.

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Buttercoins OP t1_iyemagl wrote

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.

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Mysunsai t1_iyemwh4 wrote

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.

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Buttercoins OP t1_iyeohag wrote

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.

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Its-a-write-off t1_iye5vf5 wrote

Losses in 2022 can't offset the taxes on gains in 2021. This is not a good position to be in. I'm sorry. Ask the CPA if an offer in compromise might be an option.

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Buttercoins OP t1_iyeklvv wrote

Thank you, if a CPA does advise an offer in compromise, and my uncle is willing to be fully transparent showing his brokerage statements, bank account, etc., would they take into account his financial ignorance and the lack of any meaningful gain? His trading history is very straightforward, and the paper trail is not complicated.

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Its-a-write-off t1_iyelgfc wrote

All they really look at is his ability to pay it back. Ignorance of the law is not usually taken into consideration.

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