Wash Away Stock Losers With Winners

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Capital losses can offset capital gains. In layman’s terms, if you’re winning in a particular stock then you can offset that (not pay capital gains taxes on it) by selling that stock and some other stock in which you’re losing money. If let’s say you’ve had zero gains and a bunch of losers, the IRS lets you take up to $3,000 of those losses and offset some other type of income (your job). All this predicated on the fact that you sell the stock before this Friday, Dec. 31st. This is the reason why you’ll start hearing market professionals talk about selling your losers to offset the winners.

You have two types of winners but only one type of loser.

All Losers Are The Same:

Example: You bought 100 shares of XYZ Holdings at $100 a share and it went down the tubes and is trading at $20 a share now. When you sell it (and only after you sell it, because then it’s a realized loss), you’ve incurred a loss of $8,000. It doesn’t matter how long you’ve had this dog because Uncle Sam doesn’t want any of your money so he doesn’t care.

Short Term Winner:

If you’ve held a stock for less than a year (so you bought it sometime in 2005), then it’s subject to short term capital gains which is your marginal tax rate. It means what you’ve earned in the stock is treated as ordinary income, as if you’ve taken a second job. If you wanted to offset a loser, this is the winner you want to sell because it’s being taxed the most.
Example: Let’s say that you’re in the 25% marginal tax bracket and you have watched your 100 shares of ABC Construction Corp soar from your purchase price of $5 to $100, or an unrealized gain of $9,500. If you didn’t have a loss to offset it, you’d pay 25% tax on $9,500 – $2,375 in taxes. You decide that you want to sell XYZ and incur the realized loss of $8,000 so your net is now a mere $1,950. Your tax bill drops from $2,375 to $487.50. But, you don’t need to sell your entire stake in your winner, ABC, you can just sell enough to cover the loss if you still believe ABC has legs.

Long Term Winner:

If you’ve held a stock for more than a year (so you bought it in 2004), then it’s subject to long term capital gains which is only 15%. This means your tax savings are less but the same example from above works.

Wash Rule:

To prevent someone from selling and then immediately buying back their winners, you can’t offset if you re-enter a stock within 30 days. On the 31st day after you sell the stock, you can buy back in. Nothing prevents you from buying back in within 30 days, but you lose the privilege of offsetting your losses.

The thirty-day rule also applies to buying into your position before you sell out at a loss. For example, if you buy into a stock, you have to wait thirty days before selling your existing losing position if you want to write off the loss.

Clock’s ticking… only four more trading days in the year (market’s closed tomorrow in observation of Christmas Day)!

{ 7 comments, please add your thoughts now! }

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7 Responses to “Wash Away Stock Losers With Winners”

  1. FMF says:

    I just sold a bunch of losers because I had many winners this year. It won’t offset all the gains, but did help a bit — and now I’m rid of those losing stocks!

  2. Uncle Foobar says:

    One thing:

    The Losses carry over (right?) so a large loss can go on for years in your taxes.

    Also: if you do incur large losses, talk to a CPA familar with traders; see:

    (note: not an endorsement or recommendation; the web site is
    pretty thorough though for going from an investor to a trader)


  3. The Carnival of Investing

    JLP at All Things Financial is hosting the 2nd Carnival of Investing. Go check it out – here are the ones I found interesting:

  4. Bilal says:

    I am confused about the wash rule… so, it is compulsory to every one that a person can not buy a new stock for 30 days if he sells a stock of the particular company. Is this rule true for a that particular stock company or you can not buy any stock within the 30 days time slot. 2nd question is that if I buy the stock and then sell it after a week, how much tax I have to pay on the gain… Is there any tax benefit to a student?


  5. jim says:

    In order to take advantage of the tax benefit, you can’t buy back your losing stock within 30 days of selling it. If you do, then you surrender the tax benefit of being able to write off that loss. It prevents people from selling the stock and buying it back in immediately. It’s specific to the company.

    So, if I lost 20% on shares of XYZ Company and I sell it today, I must wait 31 days before I can rebuy the shares of XYZ Company if I want to write off the 20% loss off my taxes. If I buy within 31 days, then I can no longer write off the loss.

    I don’t know if there is a tax benefit to the student because I don’t have enough information but based on your scenario you would pay short term capital gains tax, which is your marginal tax rate.

  6. Srao says:

    I would like to know how does this work in my case, say I have stock of some abc company and it is washer(-ver benifit). How can I offset that with any thing else. I don’t have any benifited stocks.

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