5

I currently hold some shares of a stock that I don't expect to regain much value. I bought this (at a higher price) about 8 months ago.

My limited understanding of the way capital gains taxes work in the US (so please correct me if I am wrong) is that if you gain money on a stock that you owned for less than a year, you would pay more in taxes than if you had owned that stock for more than a year. Is there a similar principle for losses?

At this point, I don't expect the price of the stock in question to go up or down a substantial amount int he next few months. So, assuming there is no difference in taxes, I assume I should probably sell now, so that I can free up that cash, and reinvest in a different (hopefully better) investment. Of course, if I hold the stock, there is the long shot of the company being bought out, but I don't want to count on that happening.

So, my main question is:

Is there a difference, tax-wise in short-term and long-term losses?

Any other thoughts on my general approach are also welcome.

EDIT I should also mention that I am not really planning on having any realized capital gains this year, which might be useful to offset this loss.

8

From Intuit:

Can I deduct my capital losses?

"Yes, but there are limits. Losses on your investments are first used to offset capital gains of the same type. So short-term losses are first deducted against short-term gains, and long-term losses are deducted against long-term gains. Net losses of either type can then be deducted against the other kind of gain."

"If you have an overall net capital loss for the year, you can deduct up to $3,000 of that loss against other kinds of income, including your salary, for example, and interest income. Any excess net capital loss can be carried over to subsequent years to be deducted against capital gains and against up to $3,000 of other kinds of income."

So in your case, take the loss now if you have short term gains. Also take it if you want to take a deduction on your salary (but this maxes at 3k, but you can keep using an additional 3k each year into the future until its all used up).

There isn't really an advantage to a long term loss right now (since long term rates are LOWER than short term rates).

2

My understanding is that losses are first deductible against any capital gains you may have, then against your regular income (up to $3,000 per year). If you still have a loss after that, the loss may be carried over to offset capital gains or income in subsequent years

As you suspect, a short term capital loss is deductible against short term capital gains and long term losses are deductible against long term gains. So taking the loss now MIGHT be beneficial from a tax perspective. I say MIGHT because there are a couple scenarios in which it either may not matter, or actually be detrimental:

  1. If you don't have any short term capital gains this year, but you have long term capital gains, you would have to use the short term loss to offset the long term gain before you could apply it to ordinary income. So in that situation you lose out on the difference between the long term tax rate (15%) and your ordinary income rate (potentially higher).

  2. If you keep the stock, and sell it for a long term loss next year, but you only have short-term capital gains or no capital gains next year, then you may use the long term loss to offset your short-term gains (first) or your ordinary income.

Clear as mud? The whole mess is outlined in IRS Publication 550

Finally, if you still think the stock is good, but just want to take the tax loss, you can sell the stock now (to realize the loss) then re-buy it in 30 days. This is called Tax Loss Harvesting. The 30 day delay is an IRS requirement for being allowed to realize the loss.

  • Ahh, god point. I am not planning on having any gains this year, as my overall strategy is a long-term one. I have updated the question to include this. But, are you saying that as long as the loss is less than $3,000, then I can just deduct it from my regular income, so not to worry about the short-term-ness of the stock? – pkaeding Aug 11 '10 at 20:36
  • 1
    @pkaeding - yes, if you have no capital gains, you can deduct from ordinary income up to $3,000 (whether it's a long term or short term loss). If it's more than $3,000 you just carry the rest of it over to the next year and apply the same rules. Updated my answer as well to provide more info and probably make things even more confusing :) – Eric Petroelje Aug 11 '10 at 20:51

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.