Just to add another wrinkle to this discussion - don't forget about the Section 1256 election under 1256(d) that lets traders avoid the 60/40 split and mark-to-market rules for certain hedging transactions. If your client was using these contracts as hedges for their business rather than for speculation, they might qualify for this election, which would change how the losses are treated.

This is a great discussion about Section 1256 contract losses! I wanted to add one more consideration that hasn't been mentioned yet - the timing of when you file the amended return for the carryback. You have up to 3 years from the due date of the original return (or the date it was filed, if later) to file the amended return claiming the carryback. However, if you're also dealing with NOL carrybacks or other loss carrybacks, the interaction between different types of losses can get complex. Also, keep in mind that carrying back the Section 1256 losses might affect other items on the prior year return, like the 3.8% net investment income tax if your client's AGI was high enough. Sometimes the additional tax savings from avoiding NIIT can make the carryback even more valuable than just the regular income tax savings. One last tip - if you do decide to proceed with the carryback, make sure to include a detailed statement with the amended return explaining the calculation and referencing the Section 1256 contracts that generated the loss. This helps prevent any confusion during IRS processing.

Has anyone dealt with the "reasonable compensation" issue with an S-Corp? I'm getting conflicting advice from different accountants about how much I need to pay myself vs take as distributions.

For graphic design specifically, I'd recommend checking the Bureau of Labor Statistics Occupational Employment and Wages data for "Graphic Designers" in your geographic area. The IRS often references BLS data during audits as it's considered authoritative government data. I also used Glassdoor and PayScale to document salary ranges, but made sure to filter by experience level and location. The key is showing you did your homework - I created a simple spreadsheet with 5-10 comparable positions and their salary ranges, then documented why I chose a specific amount within that range based on my experience and responsibilities. One thing that helped during my audit was showing that my total compensation (salary + distributions) wasn't unreasonably low compared to what an independent contractor in my field would charge for the same work. The IRS wants to see that you're not just minimizing salary to avoid employment taxes, but that there's genuine business reasoning behind your compensation structure.

To answer your second question about why we pay taxes on gross vs net - it's because the tax system is designed so that deductions are controlled by tax policy. If we taxed true "net" (after all your expenses), people would claim all sorts of personal expenses as deductions. Instead, the system defines specific deductions that are allowed (mortgage interest, certain business expenses, etc.) and everything else is considered part of your taxable income. It's not perfect, but it creates a more standardized system.

Box 1 on W-2 isn't actually gross or net - it's somewhere in between. It's your earnings minus pre-tax deductions like 401k, health insurance, HSA, etc. But it's not your take-home pay either because it's before federal/state/local taxes are withheld. The true gross income (what you earned before ANYTHING was taken out) isn't directly shown on a W-2. Box 3 and 5 are closest but even those might have some deductions taken out.

I think there's another major issue with your strategy that no one's mentioned yet. It assumes you can accurately predict which stocks will rise and which will fall. Even professional fund managers struggle with this consistently. What happens if 70% of your picks fall and only 30% rise? Or if they all rise but in different proportions than expected? Your whole strategy depends on having enough losses to harvest when needed, but the market doesn't conveniently provide those when tax time comes around. I've had years where almost everything in my portfolio went up (great for returns, terrible for tax harvesting) and other years where I had plenty of losses but not enough gains to offset!

Great discussion everyone! As someone who's been implementing tax-loss harvesting for a few years, I wanted to add a practical perspective on timing and execution. One thing that's helped me is thinking about this strategy in quarters rather than just at year-end. I review my positions every 3 months to identify harvesting opportunities throughout the year. This helps avoid the December rush when everyone is doing the same thing (which can actually move prices unfavorably). Also, consider using broad market ETFs for your diversified positions instead of individual stocks. Something like VTI or ITOT for your "winner" bucket gives you instant diversification without the stock-picking risk that Romeo mentioned. Then you can use sector ETFs or individual stocks for more targeted loss harvesting when opportunities arise. The key insight I've learned is to make investment decisions first, tax decisions second. Don't let the tail wag the dog - if you have a great long-term position that happens to be down, don't sell it just for tax harvesting if you believe in the underlying investment thesis. One last tip: keep a spreadsheet tracking your wash sale windows. Nothing worse than accidentally triggering the wash sale rule and losing your tax benefit!

Don't forget there are two types of dependents: qualifying child and qualifying relative. GF would fall under qualifying relative, which means: 1. They don't need to be related if they lived with you all year 2. Their gross income must be under $4,700 3. You must provide over half of total support 4. They can't be claimed as a qualifying child by someone else The support test is the big one. Calculate EVERYTHING: - Housing (fair rental value of space) - Food - Utilities - Medical/dental - Education - Clothing - Transportation Car insurance, health insurance and phone are definitely part of support calculation, so add those to her parents' side.

This is exactly the kind of situation where you really need to sit down and crunch the actual numbers with her parents. I went through something similar when my partner moved in with me during grad school. Here's what I learned: housing costs in expensive cities like Boston often make up the largest chunk of support. At $3,200/month rent, you're looking at $38,400 annually just for housing. Add food, utilities, and other living expenses, and you're probably providing $45,000+ in support. Meanwhile, her parents are covering car insurance (maybe $1,200/year?), cell phone ($600-1,200/year), and health insurance (this varies widely but could be $3,000-8,000/year depending on the plan). The key question is: what's her total annual support amount, and who provides more than half? Don't forget to include the fair rental value of her share of your apartment space, not just what you pay in rent. I'd recommend creating a spreadsheet with both sides of support and having an honest conversation with her family. In my case, it was clear I was providing about 75% of total support, so her parents agreed I should claim her. Most reasonable parents will understand the math once you lay it out clearly. Just make sure whoever claims her can actually benefit from the deduction - sometimes it makes more financial sense for the higher earner to claim the dependent even if it's close to 50/50 on support.