Comments on: $3,000 Capital Loss Deduction

By: Chris

Chris — Wed, 22 Oct 2008 17:07:39 +0000

Investment/Tax pros like to call this strategy "harvesting your losses". You sell your beaten up fund to get your tax loss, buy another fund that holds similar stocks to stay in the sector for 31 days (if you prefer), & then sell the subustitued fund after 30 days & buy into your old fund. You get the tax loss, get to stay in the same sector for the month period, & then buy your old fund again at a lower pricer. Esy as pie! Chris

By: Steve

Steve — Wed, 22 Oct 2008 14:58:59 +0000

What some people don’t realize is that if you do buy back into the same stock within the 30 days and violate the wash rule, in the IRS’s eyes your new cost basis includes the disallowed loss. So you don’t completely lose the ability to deduct the loss, you just delay it until you sell the new shares.

Ex: If you buy at $1000, sell at $800. The next day you decide that was a mistake. You buy back in at $800. You cannot deduct the $200 this year, but when you eventually sell the shares, you will essentially deduct the loss from the first sale since your cost basis is $800 + $200 disallowed loss.

By: A Non

A Non — Wed, 22 Oct 2008 04:08:00 +0000

I think you mean “tax refund” not “tax return”

Another important aspect is that the $3,000 is taken off your AGI (bottom of the first page of you 1040 tax form) – this amount affects many other taxes – earned income, credit, liability for alternative minimum tax (AMT), phaseout of personal exemption, phaseout of itemized deductions and possiblly other items.

However, selling at a loss and buying another similar investment reduces your cost basis compared to the original investment. For example, if you took the $7,000 sale proceeds in your example and reinvested in a similar investment that subsequently increased in value to $10,000 then you would be liable for tax on the $3,000 gain, but this would be at the lower tax rate levied on capital gains.

In summary, selling at a loss accomplishes two things: provides an immediate tax reduction in exchange for a subsequent tax; and converts a taxable gain at a lower rate (cap gains) into a tax loss at a higher rate (earned income tax rate)

By: Miss M

Miss M — Tue, 21 Oct 2008 22:49:06 +0000

I haven’t done this before but I’m certainly thinking about it this year, I’ve generally stuck with buy and hold. I’ve got an investment or two that in hindsight, don’t seem like such a good idea. If I’m not sure it’s a good investment, why hold on to it… I’m waiting a little longer before I do it, want to look at my expected taxes this year first.