Must-Know Tax Laws That Could Help You Save Money

As trader tax advisors, we often get consultation requests that need immediate attention. With a commitment to giving the best kind of service, we do our best to provide what we can to those who require our services. Here’s an example of a scenario that might be able to help you out too.

A client had once come to us with an urgent call. Emma called after she finished our Core Tax Strategies online course. This popular class covers helpful topics including trader tax laws. With a plea to have an urgent consultation, Emma shared her concern. She recently found out that her tax return was filed incorrectly. With the realization that she might have to pay a $10,000 penalty, Emma needed our help right away.

Emma was a starting forex trader and her husband is a doctor. They belong to the highest tax bracket of 39.6% because of their gross income was about $450,000. That year, she lost over $51,000. Emma and her husband had a CPA but he was not very familiar with IRS tax regulations.

Here are a couple of those tax laws that we can apply to this situation:

  • Firstly, Forex trading losses are part of the IRC 988, which makes it an ordinary loss that can offset any income (passive, capital, ordinary, etc.).
  • Second, ordinary losses will not be limited by amount, unlike capital losses which are limited to only $3,000 yearly.

Unfortunately, Emma’s CPA reported her losses on Schedule D, which cost her north of $20,000!

It was apparent what was needed to be done – file an amended return immediately, before the deadline comes. Keep in mind that the IRS allows amendment of a return within 3 years after filing. With this in mind, we finished filing an amendment return in just a couple of months. Emma did not only receive a refund, she also got interest of around $21,000!

If you are wondering about the $10,000 penalty, we were able to successfully abate it. We realized that Emma’s CPA did not think about “Disclosure of Loss Reportable Transactions” – an IRS regulation that should be reported. Under Internal Revenue Code section 988, a loss from foreign currency transactions is considered a loss transaction if its gross amount is $50,000 or more in a single year. Emma’s loss was a little over that amount, so she was eligible for this rule and the penalty wasn’t reported in due time too.

Our request to abate the $10,000 penalty was granted, saving our client even more money. Without Emma’s knowledge about these two tax laws, she would have been forced to pay unnecessary taxes. This proves that the right kind of knowledge could help you big time and set your finances straight. Learn more about tax laws and other helpful tips on our site!