Making The Most Out Of A Bad Situation
With the stock markets probably
having their best year even in 1999,the idea that tax-loss selling, or even the suggestion
of it, might be anathema to some die-hard market bulls.
However, as we have pointed out on numerous
occasions, there has been a Jekyll and Hyde quality to the market this year. Looking at
the popular averages and listening to all the publicity for the high flying tech and
internet shares, one gets a distorted, or one sided, picture of the broader market, which
has not had as good year.
Just looking at the breadth data of the
markets will quickly reveal that for most of the year losers have outpaced gainers not
only on the NYSE but on the NASDAQ as well.
Even more telling is the fact that
throughout the year, daily new lows on the Big Board have been running well ahead of the
So if you had a bad year, you are not alone
and you should seriously consider taking advantage of the opportunity of engaging in some
tax-loss selling. In effect, you will be laying off some of your losses on the U.S.
Government by in effect reducing your taxable income.
Of course there are rules and regulations
dealing with all aspects of this practice and investors are advised to consult with their
tax advisers as to the specific benefits available to them.
There are also different strategies to
which one can apply tax-loss selling and these need to be verified before action is taken.
Specifically, in addition to using the tax-loss strategy to get rid of a poor performer
and get benefit out of the loss, it may also make sense to consider taking a loss as an
incentive to taking a profit on another holding.
An investor has a healthy profit in XYZ
Corp. but due to the large profit that will be realized he is reluctant to sell because he
will incur a large tax liability. If he is holding another investment, UVW Inc., that has
been a "dog" but has been reluctant to sell because he has an aversion to taking
losses, now may be the time to make it "a winner" by using the loss to offset
the profit on XYZ Corp.
In planning for tax-loss selling, there are
a few rules that one need keep in mind. Probably the most important caveat is that there
is a difference between short-term and long-term losses. If the security has been held for
less than a year, the loss is regarded as a short-term loss. If it is held more than a
year it a long-term loss. This is an important distinction because there is a difference
in tax treatment of short-term gains and long-term. Short-term gains are taxed as regular
income, whereas long-term gains are taxed at a lower rate.
However, the IRS requires that short-term
gains must first be used to offset long-term profits and only to the extent they exceed
the long-term gains can they be used to offset short-term gains. In the event the investor
has no capital gains against which to offset the loss, the IRS allows for the application
of up to $3000 of the loss against ordinary income. Any excess loss may be carried forward
for a period of 15-years with $3000 per year applicable against income. If the loss exceed
this amount, the investor will not able to take full advantage of the loss.
One other point, when engaging in tax loss
selling, a 30-day period must elapse before the shares can be repurchased, in order to
take advantage of the loss.
Tax-loss selling is a strategy that
investors have available to them in planning portfolio strategies. It is not a cure all,
but like stop-loss orders, it is a strategy that can be employed by astute investors to
get better performance out of their portfolios or at least get some benefit from poor
As stated earlier, though, one should
consult a tax specialist for more specific information and explanation of the regulations.
Disclaimer - The information contained in
the documents in this website should not be construed as an offer to
sell, or a solicitation to buy, any securities referred to herein.
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accuracy or completeness. TheStockAdvisor specifically disclaims
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