Tax Court Says Day Trading Is Dissipation

March 25, 2011

If you find yourself owing the IRS more than you can possibly pay, you may be able to settle for a reduced amount through a procedure called an offer in compromise. The IRS doesn’t always agree, however. Among other possible reasons, they may reject an offer in compromise if it appears you dissipated assets, consuming or wasting money that could have been used to pay your debt to the government. In a recent case, the Tax Court ruled that the IRS can treat losses incurred in day trading as dissipation. The result is unusual because people who take up day trading generally do so with the thought that they’ll make a profit, rather than fritter money away.

That was what Larry Tucker, the taxpayer in this case (PDF), argued. He said he was trying to grow his wealth so he could pay all his creditors, including the IRS. Yet the court called his attempt “purely speculative,” and said his “already slim chances of success were undermined by his inexperience.” In effect, the court treated Tucker the same as if he had taken the money to Las Vegas and lost it in a casino.

The result may seem harsh, but in reality Tucker would have had better odds in a casino. Risk $20,000 betting black or red on a single turn of the roulette wheel and you have about a 47% chance you’ll double your money. Statistics indicate that fewer than 10% of people who try day trading are successful. We’ve known for some time that day trading is dangerous to your wealth; now we know it can also hamper your ability to settle up with the IRS.

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