It’s the end of the year and time to consider if it’s wise to sell capital losses from investments or not! I had some stinkers from “The Great Recession” still lingering, so I do have some losses to apply!
Of course, I don’t always get to apply capital losses (luckily) every year because I don’t always have stock losses, but this year I do.
In addition to countering the capital gains I had this year, I decided to use some of my capital losses counter the gains in the earnings I have from blogging. Since my earned income from blogging is low, the capital losses from selling stocks help to reduce my income taxes.
The rules of applying capital losses to earned income is as follows:
Capital losses. Losses on sales of capital assets offset capital gains on a dollar-for-dollar basis. That makes your gains potentially tax-free. Any excess losses can offset as much as $3,000 in other non-capital income. Losses in excess of this $3,000 annual limit in 2005 will be carried forward into your 2006 pot. How much is the $3,000 loss worth at tax time: if you’re in the 25% bracket this year, it’s worth $750. If you’re in the 28% bracket, it’s worth $840. At the top rate of 35%, the deduction trims your taxes by $1,050 — more than a third of the total loss. Check out the article “Sharing your losses with Uncle Sam“ from Forbes, that this excerpt was taken from for more details!
So in a nutshell, once your capital losses exceeds your capital gains, you can take up to $3,000 of the losses against other forms of income (earned income in my case this year). If you have capital losses greater than $3,000, you must take that excess loss and apply it to the future year(s). Luckily, I don’t have to carry my loss forward!
So what is a capital gain and a capital loss?
A capital gain is the results when the price of an investment rises above its purchase price when the security is sold (realized gain).
If you bought stock A for $200 and today you sold if from $350, you capital gain is $150. (sell price – investment cost) = capital gain if it’s positive, or capital loss if negative.
The opposite (a capital loss) is if you bought stock B for $100 and today you sold if from $50, you would have a capital loss of -$50. (sell price – investment cost) = capital loss if it’s negative, or capital gain if positive.
So this is my battle plan against the upcoming tax bite, what strategies do you have?
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