EDUCATION CENTER
GTT RESOURCES: NET OPERATING LOSSES

See our Updated Trader Tax Center pages.


OLDER CONTENT: We cover this topic in Green's 2012 Trader Tax Guide
Update note: NOL's returned to 2 year carrybacks for 2010 NOLs, the 5 year choice was for 2008 and 2009 NOLs carrybacks only. Some states freeze NOL carrybacks like CA and HI.

Net Operating Losses: a huge tax benefit for traders

Business taxpayers are allowed a special huge benefit – Net Operating Loss (NOL) tax laws. NOLs provide the opportunity to carry business losses back or forward. You can make a fortune in one year and pay your taxes, then lose a fortune in the following years, carry back your NOLs and get huge refunds of taxes paid in the prior years. If it sounds too good to be true – well, it isn’t! And, you’re in for a lucky break – the NOL got even better.

The House and Senate Stimulus Bills in early 2009 both add a five year NOL carry back period choice to the standard two year NOL carry back period. This provision is expected to survive final negotiations before passage and enactment. Congress and the White House did the same thing in 2001.

  • In 2001, Congress passed temporary relief extending the carry-back period from two to five years for 2001 and 2002 NOLs. This is fantastic news for traders, because most traders made a fortune in 1997, 1998 and 1999 and then lost a fortune in 2000, 2001 and 2002. For example, a trader can carry back a 2001 NOL from 1996 through 2000, instead of just carrying it back to 1999 and 2000 (which was the previous law). This tax law change has great significance for traders, because many already carried back 2000 losses to 1998 and 1999, and have already used up the gains for those years. In summary, this tax law change will put hundreds of thousands of dollars in the pockets of many traders.

There’s even more good news! For several years now and continued under the current tax bills, AMT does not upset NOL benefits; there is no preference or 90 percent rule anymore.

Our firm has many trader clients and we have prepared hundreds of net operating loss tax returns over the years with great success. Our clients have received their refunds. In some cases, the IRS asks some questions, which are usually settled quickly. In a very few cases, the refunds are delayed. NOL refund claim tax returns are very complex and require exact execution. Otherwise, they can lead to questions from the IRS.

When it comes to NOL tax refund carry back returns on Form 1045 or Form 1040X, we strongly recommend that you engage our firm to prepare these tax returns. If these returns are not filed in the absolute best manner possible, they may draw attention from the IRS and that can lead to problems with your refunds and a full fledged exam; which might challenge your trader tax status and ordinary loss treatment (Section 475 MTM). For these types of returns, our values are the greatest; comparing our very low fees to the results (tax-benefits) received. Click here to learn more about our tax preparation services.

If your trader tax status is a "close call" and you are worried about a large NOL carry back return drawing IRS scrutiny, consider these two ideas.

  • Carry forward the NOL: Timely elect to forgo the NOL carry back and carry it forward (up to 20 years) instead. In the following tax year, the NOL is deducted on your tax return and there is no indication from where it came (no mention of trader tax status and MTM related losses). Plus next year's regular Form 1040 is filed through regular channels and it's not scrutinized by an NOL carryback processing group, bent on protecting the Treasury.

  • Absorb the NOL with a Roth IRA conversion: If you have an NOL that means you can also do a Roth IRA conversion, since you are under the modified AGI threshold. Absorb (or soak up) the NOL amount by converting a regular IRA, Rollover IRA (or other retirement plan account) into a Roth IRA. Most taxpayers need to finance this conversion by paying taxes on the amount converted to the Roth, but for you it may be tax-free, in that you may get to zero taxable income after absorbing the NOL (negative taxable income). Or generate some taxable income to take advantage of lower marginal tax brackets too.

    These special strategies and much more on NOLs are included in Green's 2009 Trader Tax Guide available on our guide page.

See the article by Robert A. Green, CPA in the September 2002 issue of Active Trader magazine (downloads are available on the Active Trader site). It includes a sample 2001 tax return together with a Form 1045 NOL refund tax return. That taxpayer example generated refund checks of close to $600,000 on trading losses of $1.6 million in 2001. The article has analysis and tips for filing NOL returns. Click here for our Active Trader articles page. Green also wrote a groundbreaking article on NOLs for traders in the March 2001 issue of Active Trader magazine.

To learn more about NOLs, visit www.irs.gov and search "net operating losses."

If you have any questions, e-mail info@greencompany.com or call us.

Ready for a consultation with a GTT CPA

 

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Highlights (see the full archive):

Aug 19: Foreign partners in a U.S. trading partnership can be tax free Read More

Aug 13: IRS warns Section 475 traders Read More

June 20: Tax treatment for Nadex binary options Read More

June 19: IRS softens its stance for some taxpayers with undeclared offshore accounts Read More

June 12: IRA rollover rule changes Read More

June 6: Bitcoin is not reported on 2013 FBARs Read More

June 5: Tax deadlines in June: U.S. residents abroad and FBAR Read More

June 2: Tax treatment for foreign futures Read More

May 21: Bitcoin tax update: Can business traders apply Section 475 elections to bitcoin trades? Read More

May 13: Puerto Ricoís tax haven status is tailor made for investors, traders and investment managers Read More

May 6: Entities: A key update on trading entities and management companies Read More

Mar 25: IRS guidance on bitcoin transactions will chill its use Read More

Feb 27: Another trader tax court loss (Assaderaghi) Read More

Feb 1: Net investment tax details Read More

Dec 4: IRS final regulations for Net Investment Tax help traders. Read More

Dec 3: Bitcoin is a hot commodity, but is it taxed like commodities, assets, or currencies? Read More

Nov 15: Another non-business trader gets busted in tax court trying to cheat the IRS. Read More

Nov 6: Hedge fund investors depend on ďassuranceĒ from quality independent CPA firms. Read More

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GreenTrader blog archive, Forbes blog, Benzinga blog.

 




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