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$3,000 Capital Loss Deduction

At the end of last year I wrote a few articles about stocks and taxes, the most important of which was the concept of deducting capital losses against capital gains [3]. One sentence in the article talked about when you have an excess of capital losses, an idea I wanted to expand upon given the recent blood letting in the capital markets. Given the combination of a slowing economy and some unrealized losses sitting on the books, consumers might want to realize the loss and take the $3,000 deduction from their regular income.

For example, if I bought $10,000 of stock in Company ABC and that stock was now worth $7,000 – I would be realizing a $3,000 loss. I record the loss on my tax return (Form 1040, Schedule D) and then transfer it to my regular form to deduct from my income. That limit is reduced to $1,500 for those married filing separately. If your losses exceed $3,000, then you can keep carrying that over year to year indefinitely.

Why would you want to do this? Your tax refund will be larger because you’ve reduced your income by $3,000. If you’re in the 25% tax bracket, your tax return would increase by $750. You’ve already lost the money, you simply haven’t realized it yet. 🙂

Why WOULDN’T you want to do this? The wash rule [4] states that you can’t claim a capital loss if you buy back into the investment within 30 days. You can buy back in after the 31st day but anytime before that and you’ve realized a loss without the tax deduction.

It’s neither a smart move or a dumb move, just a move that is made smart or dumb based on your situation.