Capital gains on unsold stocks

What is the name of your state? Japan (overseas)

From about 1996 through 2002, I was involed in the U.S. stock market (I reside in Japan and am a U.S. citizen). Although I NEVER took any money out of the market, I did make a profit in the late 90's. Then, due to the churnning and poor advice of my broker, I cashed out in 2002 with just 7,000$. I was young and really didn't know what I was doing tax wise and thus didn't include the stocks information when I filed taxes. I figured since I didn't take any money out, I didn't have to pay capital gains. As it turns out, the IRS just sent me a letter saying they have a record of sales for 2002, and they want to know what all the stocks were bought and sold for (apparently they have only the sell information). I made no profit, only realized massive loss. I am not so worried about 2002 because I incurred massive loss, everythng. But, can the IRS charge me capital gains on the profits I made on paper in the late 90's, eventhough I took out nothing and eventually lost everything ? Sorry for the long post, but any comments would be very appreciated.
Thank you

The can make you pay taxes on the gross sales price unless you file a Schedule D & report the basis for each sale. It also sounds like you never filed returns, since otherwise, the 2002 tax year would be closed & the IRS couldn't do anything about it.

You should take your IRS letter & a copy of any returns you filed to a tax pro. Look for an enrolled agent.

Thanks for the info

Thanks for the reply. Yes, I didn't file every year, only some, as my Americans do here. I guess my main question is, (and I apologized if you have already anwered it), can they make me pay capital gains on say profit on a stock in 1998 that I never took out of the market and that evenually crashed and that I never made ANY profit on.....just massive loss ?
Thanks

Yes. You can owe a big tax even though you lost money over time. This is because you take the profit in one year and the loss in another. Since the loss can be limited, you can owe for prior years.

Since I heard the word "churning" and the term "eventually crashed", it makes me think there is a possibility the above is true.

For example:
year 1: buy A for $1000
year 2: sell A for $2000 and *not take any money out* and buy B for $2000.
year 3: B rockets up and you sell for $50,000 and *not take any money out* and buy C for $50,000.
year 4: Market crashes and you sell C for the same that you put into the market, $1000.

Year 1 you have no taxable event. Year 2 you have a capital gain of $1000. Year 3 you have a capital gain of $48,000. Year 4 you have a capital loss of $49,000. You see, you ended up where you started, but you have to pay taxes on the money until year 4 where you will get to deduct $3000 a year until you use it up with gains or with the $3000 a year amount.

So yes, you can owe even though you didn't take any money out of the account. The taxable event occurred each time you sold. You need to file a schedule D listing the basis of each stock sold in the year the IRS is questioning. Even then, you may owe.

Thanks

Thanks, that answered my question. So I guess I've got a problem. The IRS only mentioned 2002. If it stops there fine, if not....well....I'm a bit worried about that. Another question: as it stands right now I've really got no assests. That is no house, car etc...... maybe about 20k in cash, but that is about it. What possible options do I have. Do I contact a lawyer ? Is it possible to declare bankruptcy ? Is it possible for the IRS to garish my wages from a foreign employer ? I realy do know. Again, thanks in advance for the advice.

dajiba said:

Thanks, that answered my question. So I guess I've got a problem. The IRS only mentioned 2002. If it stops there fine, if not....well....I'm a bit worried about that. Another question: as it stands right now I've really got no assests. That is no house, car etc...... maybe about 20k in cash, but that is about it. What possible options do I have. Do I contact a lawyer ? Is it possible to declare bankruptcy ? Is it possible for the IRS to garish my wages from a foreign employer ? I realy do know. Again, thanks in advance for the advice.

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You stated that you only had proceeds of 7000.00 for 2002. That will only result in 1050.00 of tax if you had no basis at all....and obviously you had a basis. You may even have had a loss. At this point you really shouldn't borrow trouble. Deal with 2002.

dajiba said:

Thanks, that answered my question. So I guess I've got a problem. The IRS only mentioned 2002. If it stops there fine, if not....well....I'm a bit worried about that. Another question: as it stands right now I've really got no assests. That is no house, car etc...... maybe about 20k in cash, but that is about it. What possible options do I have. Do I contact a lawyer ? Is it possible to declare bankruptcy ? Is it possible for the IRS to garish my wages from a foreign employer ? I realy do know. Again, thanks in advance for the advice.

Click to expand...

(1) You do not really need a lawyer, just someone with experience in dealing with IRS problems. There are many CPA's, EA's and other practititoners with this experience.

(2) Bankruptcy seems unnecessary and really would not help, since taxes would have to be assessed two years before they are dischargeable anyway.

(3) The IRS may be able to garnish your wages via tax treaty but it is highly unlikely. As long as you or your representative are dealing with them they will not likely garnish your wages anyway.

(4) Since you are employed, you need to file from 2002 forward. You will not likely owe US taxes because of the foreign earned income exclusion, but you need to file to take that election. By doing this, if you decide to return to the US, you will have a clean slate.

(5) As for what liabilities you may incur for 2002, you can get into an agreement to pay those over time. If you are living hand-to-mouth, collection can be suspended until you are able to pay. Your situation is not dire or unique. You just need to get it tended to before it grows horns.

I feel a bit better

Thanks again for the input. Yes, I did have massive, massive losses in 2002. Actually, I took my stock broker to court or rather before an ajudication board, which settled in my favor. So, I guess I'll collect all my documents and take to a professional tax accountant. Thanks again****************************......