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Overlooked Capital Losses Legal Tax Angles: How to Save Taxes Without Going to Jail Selling gains and holding losses is not only bad investment strategy, it's bad tax strategy. Even so, many investors have a tendency to sell their profitable investments and to hold their unprofitable ones. If that applies to you and if you have some capital losses, it's time to unload some of those "comeback" stocks you have been holding. Look for any forgotten investments, such as penny mining stocks, dot-com stocks or others that have lost value. However, don't ignore the impact of the transaction costs in selling securities that have only lost a small amount. If it will cost you 3% to sell a stock that has declined in value by only 6%, it wouldn't pay to sell for a tax loss unless you have decided to unload the stock anyway. Some investors may even have some potential losses in their bond portfolio for bonds that were purchased to yield higher interest rates than the current rates that are being paid on new bond issues of similar quality. An often overlooked opportunity for tax losses is from any hard assets such as gold, diamonds, collectibles or similar investments that were bought at the peak of the inflation cycle in the early 1980's. If any stock or bond has a loss of more than 10% of the current value, it is a strong candidate for sale to generate a tax deduction. You can offset an unlimited amount of capital gains with capital losses. Clearly, it doesn't make sense to buy investments that will lose money just so you can generate some tax losses. But most investors have accumulated some losses they are reluctant to sell. In addition, you can use up to $3,000 a year of deductions from losses on stocks, bonds or other capital assets to offset any other type of taxable income. It's more profitable to sell tax loss securities in years when you don't have any realized gains, because the losses can be used to offset fully taxable income -- up to $3,000 per year. If you are in the 30% tax bracket, each $1,000 of losses in excess of your gains will save you about $300 in taxes - up to a maximum of $900 per year. The first question is whether the commissions on selling the stocks or bonds will exceed the tax savings. It doesn't make sense to incur $500 of commissions in order to save $300 of taxes. But you might also ask yourself if this is a stock or bond you would buy today if you didn't already own it. If not, then sell it and use the tax loss to offset income on other investments. Up to $3,000 of capital losses can be deducted each year from any other type of income including interest, dividends or even salaries. Excess losses can be carried forward to future years, without limit. And ... any capital losses can be deducted from capital gains without limit. For example, if you had $10,000 of capital losses and $2,000 of gains, you would have $8,000 of net losses, and $3,000 could be deducted this year. The remaining $5,000 could be picked up as a loss next year and could offset any capital gains next year. Taking advantage of your unused losses is hopefully a one time tax savings. Once it's done, you must move on to other tax strategies. However, be careful to avoid the "wash sale" rule. This
rule prohibits a loss deduction for the sale of a security when you purchase a
substantially identical security within 30 days before or after the sale of the
same security at a loss. So if you want to buy back your losers, be sure to
check on the details about the wash sale rule. Vern Jacobs Copyright, 2003 |
Books and Services by Vern Jacobs
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