Coping with stock gains, losses at tax time
Dear Mr. Priest: I sold some stock this year that did really well over the past few years and I have quite a large gain. I also bought some other stocks several years ago that have not done so well. I would like to sell them at a loss, but then again, I would like to hold on to them because I think they will eventually come back. What else can I do to create a loss for this year? TylerBreckenridge
Dear Tyler: There is an easy solution to your problem but you will have to act relatively quickly and adhere to specific IRS rules that prevent something called a Wash Sale (no, a Wash Sale is not an event to purchase discount clothing at your local laundromat or dry cleaners). First of all, I realize that you want to hold onto your losing stocks in hopes that they will recover, but sell enough of these stocks to create the loss you want. Bear with me and we’ll learn about a strategy that will allow you to have your cake and eat it too. By selling these stocks while their value is down, you will create a loss in the year they are sold. This loss can be used to offset your capital gains on the winner stocks for the same year.
Any leftover losses (in excess of $3,000) can be carried forward until exhausted in future years. Now, wait until 2005 and simply buy back the shares that you really didn’t want to get rid of in the first place. However, your timing is critical because this is where the Wash Sale rule comes in. This rule will not allow you to simply sell your shares of stock, repurchase them within a relatively short period of time, and claim a loss. The Wash Sale rule says the following: If you sell a security at a loss, and 30 days before or after the sale you repurchase the same security (or a “substantial identical” security), then it is considered a “wash” and you cannot write it off as a loss.
Therefore, you must wait for 30 days to pass before repurchasing your sold stock. If you’re lucky, the price of that stock will be even lower when you buy it back. In that case, you’ll get to realize a loss, and effectively get the stock back at a discount.Be careful to consider transactions charges when selling and buying back the same stock. It’s always a good idea to consult a financial professional before using such a strategy. If done correctly, and with a little luck, you’ll get the loss you want and end up in a better position with the stock you currently own. Best wishes for the holidays and happy planning!Bob Priest, MBA, CFP, is a Certified Financial Planner serving clients locally and nationally. He can be reached at (970) 513-7077 or visit his website at http://www.BobPriestFinancial.com. All opinions herein are that of the author and not that of the Summit Daily News or its staff. Submit your financial questions to Bob@FinancialCompanies.com.
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