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I started investing in the stock market in Dec of 2013 (last year). I bought 5 stocks - 3 of which are in the red (and which I want to sell) and 2 of them are in profit.

My understanding is that in order to get maximum benefit, I must sell the 3 losing stocks before the holding period of one year so as to avail of a short term loss tax benefit on them. Is that correct? The total loss on the stocks is about 1000$.

I currently have no other short or long term gains on any stock for this year.

Should I sell the 2 profitable stocks (current profit is 400$) after the holding period of 1 year but before Dec 31st 2014 ? Or wait until Jan 2014 to sell them (so as to get maximum benefit for 2014 taxes)?

That is, will the short term losses apply against the long term gains if I sell the 2 profitable stocks before Dec 31?

Related Question (Added)

Thank you all for your responses.

Another related question .. For the profitable stocks, I see dividends have been issued and reinvested. The trade dates show up as follows (one example): 12/18/2013, 03/14/2014, 06/13/2014, 09/16/2014

Does this 'extend' my holding period date to 09/16/2014 (instead of 12/18/2013)? In other words, after Jan 1, when I sell off all of the stock will all of it qualify for a long term gain or will some of it (the dividend reinvestment) be considered short term or will all of it be considered short term?

I guess for a loss it does not matter if I incurred dividends, as they will still fall under the 1 year holding period when I sell (and will qualify for a short term loss)?

  • Are you asking this from an investment or tax perspective ? Both have very different answers, depending on what stock you hold. I am assuming it is mostly tax, but correct me if I am wrong. – DumbCoder Dec 10 '14 at 16:27
  • Tax perspective - could you explain the answers from both perspectives for my knowledge? – StockNewbie Dec 10 '14 at 16:34
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Short term losses are applied:

  1. Towards short term gains,
  2. What remains is applied towards long term gains,
  3. What remains is applied towards your AGI up to the limit of $3000,
  4. What remains is carried forward to the next year.

So if in 2014 you have no capital gains at all and only $1000 capital losses - you'll reduce your overall taxable income by $1000. What will you have in 2015 I don't know. I would do "loss harvesting" and cash out the losing stocks in 2014, in this situation, unless you don't have any other income.

The profitable stocks - why sell if they're profitable? Do you expect them to stop being? If so - hold on to them until 1 year and 1 day holding period has passed to lock the gains as long term.

  • Thanks littleadv. I do want to sell the profitable stocks (following the Magic Formula Investing strategy). Given my situation, should I sell these (once they become long term) before Dec 31, 2014 or in Jan next year? – StockNewbie Dec 10 '14 at 16:33
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    @StockNewbie In that situation, you should (probably) wait to sell the winners until January. You want the short term loss to offset a short term gain or regular income, which are at the same tax rate. You want the long term gains to be separate, so you benefit from the long term tax rate. – Degustaf Dec 10 '14 at 16:40
  • Magic Formula says to sell losers last week of the year and winners the first week of the new year when rebalancing, for the reasons stated above. – Rocky Dec 10 '14 at 16:45
  • Rocky, I don't think that MFI refers anywhere to selling in the new year (financial year) - it talks about the 1 year hold period. If stock is in loss, sell before 1 year, if it is in profit, sell after 1 year. Then buy a new set of stocks. – StockNewbie Dec 10 '14 at 18:41
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littleadv covered your first question. I'll address your additional question about shares purchased through dividend reinvestment.

The holding period for a share is computed from the date of acquisition of that particular share. So, your original shares will be treated as long-term a year and a day after you bought them. The shares purchased at each dividend distribution will remain short-term until a year has passed since the distribution date on which they were purchased.

You will have tax liability for the dividends earned in 2014, even though they were immediately reinvested. That will, of course, then become part of the cost basis of the shares, and you will only pay (short-term, in this case) capital gains on the increase in price of the "extra" shares since the dividends were reinvested.

If you end up selling all the shares at once, your brokerage will almost certainly send you a statement with the long-term/short-term breakdown, along with the cost basis for each type. If you want to sell only a portion of your shares, and want to only realize a particular type of gain (or loss), you should direct your brokerage to sell specific shares--the ones that reflect the cost basis you want. Otherwise, I think they will usually sell the oldest shares first (first-in, first-out).

  • Re that last point I've been letting things run FIFO simply because (A) I'm mostly buy-and-hold so most nontrivial sales are longterm anyway, and (B) it's a hassle keeping track of individual lots, and I'm not convinced that optimizing this will really make enough of a difference to my retirement savings to be worth the effort. – keshlam Dec 11 '14 at 1:43

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