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Time To Sell Year End Capital Losses?

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?

-MR

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25 Responses to Time To Sell Year End Capital Losses?

  1. My plan for this year was to make less money! OK, my plan wasn’t intentional, but that is what happened when I didn’t work February – October. I am curious to see what will happen to my tax bill.

    We have already done all the home improvements that would qualify for credits (or at least the reasonable ones). I do plan on donating to Salvation Army one more time before the end of the year.

  2. I really should have taken advantage of the tax credits for home improvements! I’m just starting to get a traction on my savings, so I didn’t spend any money on such improvements.

    My 401k balance is the highest it’s been ever, but from the beginning of 2008, I’m still down 6% (this is a great improvement for me.) Probably sometime in January, I’ll rebalance my portfolio.

  3. I finally got around to funding my Roth. I’d funded DH’s but kept forgetting to transfer money to mine. And then when I did transfer, I forgot to actually buy stocks!

    There’s so much that gets packed in between the few days between the end of the semester and Christmas… We saw the dentist, took my car in to investigate the oil leak and the rumbling, did a LOT of cleaning, took care of estimated taxes, Christmas shopping and cards, etc. etc. etc.

    We sold losses at the beginning of last year. It’s a big hassle because they were bought a long long time ago and etrade never got the basis information from Brown & Co, so that is going to be a fun trip through the filing cabinet archives. Maybe we’ll update basis information for all the stocks etrade has no info on while we’re at it. That’ll make selling things a lot easier in the future. Though we’re mostly all indexed or ETF’d these days.

  4. I already sold off a few losers to offset some gain this year. I still have two left in the limit order so probably will just sell at market today so I can take the loss.
    Next year, I will gradually move my portfolio away from growth to value/yield.

  5. Good reminder. I don’t sell losers just for the tax benefit if I would have planned on holding otherwise. But I always have a languishing position or two that it’s worth dumping just before year end to get it over with and take the tax benefit in this calendar year.

    • With my accounts I’m just selling that which I don’t think will go up or worse, decline some more.

      With my kids accounts, I’m trying to reduce the tax basis for the future, so I do play around with their accounts.

  6. Not many are aware that you can carry forward your losses if over the limit for the current year. You highlight this very nicely, MR!

    I had some stinkers I sold. Mostly it was a good year.

  7. Good post! The market has been up so no capital losses this years. I did my house cleaning (sold losers) last year. I look forward to another good year.

  8. This sounds like a reasonable strategy. I do have a few more business-related purchases that I have to make really soon. They’re planned and completely legit. Inadvertently, they reduce profit and thereby taxes.

  9. I think 2011 should be the year I’m more proactive with my investments. Hopefully I’ll have some time and money to spend on it.

    I’m still no where near an all time high thanks to my GE stock that tanked. (I worked there for over a decade, so a lot of our savings were tied up in it as it was our only 401K option for a long time). I sold most of it, but it’ll take years to undo the damage.

    • I’m hoping I make more of the year 2011 than I did in 2010. I’m going to blog about taking a different approach next week instead of creating resolutions.

      It’s amazing how blue chips stocks like GE fell during the market downturn! Hopefully, you’ll recover right quick!