do i pay tax for each transaction i make buying and selling stocks on short terms?

Question

i opened an investment account online for $2000. with that money i've bought and sold stocks totaling to about $40,000. i made a little money at first but ended up in a loss in the end. now the irs is charging me about $10,000 in unpaid taxes. how can that be when i only have $2000 to begin with and actually lost money?

Answer 1

You show each transaction on your tax return, and show the gain or loss on that transaction. You add up all the gains and losses for the year, and pay tax on the net.

If you didn't report the transactions on your tax return, the IRS will still get the 1099 copy from your broker. They'll send you a letter, I think it's CP-1000 or -2000, telling you that you didn't report it, and assessing tax on the sales. They only know, though, what you sold, not what you paid for each block of stock that you sold, so they assess the tax on the total sales.

The good news is that you probably don't owe anywhere near what they say, and might not owe anything. What you need to do is get the info from the broker on each sale, and the purchase price for the stock, and fill out a schedule D showing all of this. If you're not sure how to do this, make an appointment with a CPA and let them handle it.

Good luck. This situation is common when people fail to report their stock sales - and it's probably not nearly as bad as the initial IRS letter indicated. They aren't trying to cheat you - they just don't know what you paid for any of the stock that you sold. Your broker should have the info. It's really not hard to straighten out, although getting a bill for $10K can be a real heart-stopper.

Answer 2

Probably you didn't report the sales of the stocks on Schedule D on your income tax return or didn't report some of them. What the IRS gets is a record of all the sales that you had during the year. But what they don't get is how much it cost you to buy the stocks in the first place. So if they don't see a stock that you sold during the year listed on your tax return they will add the sale to your tax return and give you a cost basis on that stock of $0, so that you have a gain of 100% of the sale. You probably received a notice from them saying that you owed the $10,000 in unpaid taxes (probably also includes interest and penalties as well), but they should have also included any sales that they have that you didn't have. You would just need to fill out a corrected 1040, including the missing stock sales and the stock cost, and that should make the notice disappear, if you indeed did have losses on the sales. I am a CPA/Tax Preparer and we get clients who give us notices with the exact same thing.

Answer 3

You are taxed on each transaction when you sell stocks, not when you buy the stocks. If you have short-term gain, that is added to your income and taxed along with your wages. If you have a loss, that is subtracted from your gains.

Take all your stock transaction information, your return for 2006 if it was filed, plus the letter from the IRS to a preparer. They will comply with the terms of the letter, whether that is to amend your return or to fill out Schedule D Capital Gains and Losses.

If at the end of the year your account had $2,000 or less, then you can rest assured that you will not owe significant tax, since the gains and losses will be cancelled out. But you will have to document this. The IRS only looks at the proceeds from the sales and is adding up the same money over and over again.

So, not to worry, but take care of it immediately.

Answer 4

So you started with $2,000 and have stocks totalling $40,000 and you say there is a loss? What loss? You've gained $38,000! If by loss you mean "at some point my stocks were worth $40,000 but now they're only worth $35,000" you've still have a gain.

Either way, you pay taxes on gains from selling stocks when you file your tax return. If the IRS is charging you for unpaid taxes, then you obviously did not file your tax return stating these gains.

Answer 5

Did you fill out a Sch D for the tax year in which the transactions occurred? The IRS gets a 1099B reporting gross amount you received from each sale. It is up to you to have that reported amount on a Sch D; along with other information such as when you bought and when you sold; and how much you paid for the stock. That way you identify it as being a loss. You can carry forward unused loss to following tax years, too. You may have to fill out a 1040X with a sch D attached to correct the year the IRS is after you over.

Answer 6

Both of the above answers are correct.

You may have had a gain on some transactions and losses on others. However, you have to list each transaction separately for tax purposes. Be sure to include commissions that you paid.