Hello SOTGC community,
Sick of staring at the losers in your stock portfolio? If they are sitting in a taxable account, you have until 1pm Pacific Time on Monday, Dec 31 to take action to lower your 2012 tax bill.
Looking at “red ink” in your stock portfolio can be depressing, but during the last few days of December looking at red puts a smile on my face. It means that I can sell some or all of the stocks that have declined in value and offset the taxable gains I have generated throughout the year from selling the winners. The bonus? This is also an opportunity to shield up to $3,000 of my earned income from income tax.
A capital loss generally occurs as a result of selling an investment at a price less than what you paid for it. The key point to remember is that capital losses are only losses after you sell them.
A stock sitting in your portfolio doesn’t do you any tax-related good until you sell it. In order to take advantage of this tax benefit, you must file a Schedule D when you complete your tax return. Gains and losses are categorized as “short-term” and “long-term.” Short-term losses counterbalance short-term gains and long-term losses counterbalance long-term gains. A loss in one section can offset a gain in the other section.
For example, if you have a net short-term loss of $1,000 and a net long-term gain of $1,200, then you’ll pay tax on only $200. If there’s still a loss, you can deduct up to $3,000 from other income. If you end up with a net loss of more than $3,000, you can carry forward the leftover portion to next year’s taxes. The unused loss can be applied to next year’s gains as well as up to $3,000 of earned income. A big loss can be used as a deduction for future years if you keep good records.