IRS, Tax related strategies--Traders Message Board

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Strategies & Market Trends : IRS, Tax related strategies--Traders

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To: Tom_ who wrote (747)	3/6/1999 2:56:00 PM
From: Nandu	Read Replies (2) of 1383

Maybe I am a fool, but I have to disagree with you and Colin: Your calculation is faulty. The $1000 gain the first year, and the $1000 gain the second year are both only on paper. They are not real. You save 400 on taxes the first year, but pay it the next. The only way you would gain is if your marginal tax rate declined the second year. You do gain one year's interest on the $400, though. Another thing. If you are a trader who don't hold positions long term, MTM is OK, but if you have long term positions, MTM may force you to pay taxes on your paper gains every year rather than when you finally sell. Not a good thing. An MTM trader is sitting on a $10,000 gain. He has withdrawn it from his trading account and put it in the bank. He's a California resident with a combined federal-state tax rate of 40%. Therefore $4,000 of the money in the bank is earmarked for tax payment. He buys 100 shares of XYZ at 100. It goes down. He sells at 90. He has a paper loss of $1000. But, since the $1000 loss offsets $1000 of his gains, he actually owes $400 less tax and so has a real life net gain of $400 in his bank account. He immediately buys 100 XYZ at 90. The stock goes up. He sells at 100. He has a $1000 gain, from his new 90 basis. He therefore owes $400 tax on it. He has netted another $600. In sum, he has netted $1000 on a stock that hasn't moved.

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