Harvesting Stock Losses for Tax Savings

AD Singleton & Co, CPA, Inc.'s

Watch Your Wallet!

A newsletter for clients and friends.
December 2008 | Published by ADSCPA

A collection of practical tax and financial tips, articles, and resources targeted to help you watch your wallet and keep what you earn.

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Many people have taken huge hits in their investment and retirement portfolios from the crisis in the financial markets. Not only have many stocks declined in value in recent months; others have become worthless. In today's market, you are likely to have in your taxable investment portfolio holdings that are currently priced below your purchase price. Now might be a good time to sell those stocks or mutual funds to generate losses to offset capital gains and then up to $3,000 of your ordinary income.

Alternatively, you may intend to keep a loss security in your investment portfolio, if you think it will go up in the future. If that's the case, you may be able to sell the stock, recognize the loss, and then reacquire it to continue your investment. However, to use the loss on your 2008 tax return, the 'wash sale' rules state that you must wait 30 days after the sale to repurchase the security.

One strategy to avoid lost investment opportunities while fulfilling the 30-day rule is to purchase additional shares of the security now, especially if you anticipate that the stock price may rise during the next 30-day period. After you have held the newly acquired stock for 30 days, you can sell the original shares at a loss that will be recognized for tax purposes. Another strategy is to sell now and then reinvest the proceeds immediately in shares of a company in the same industry that are likely to perform similarly to the stock you just sold. In either case, your loss qualifies for full capital loss treatment and can offset capital gains, with any excess used to offset up to $3,000 of ordinary income.

Worthless stock also generates an immediate deduction. The rules for "worthless" stocks are very strict. Your definition of worthless may be very different from the IRS' definition. Stocks and securities must be totally worthless for a taxpayer to take a loss deduction. A mere diminution in value, no matter how great, will not trigger a loss deduction.

If you have losses in a taxable account (i.e. not an IRA or retirement account), call us today for help in making a little bit of tax lemonade from the market's lemons.