It's hard to escape the news that the stock market is currently on a roller coaster ride. Thinking of selling? You may have a capital loss.
When you sell a security or investment for less than you originally paid for it you have a capital loss. If you held the investment for less than a year, it is considered short-term. Over a year and it is long-term. Of course, if you hold the investment and do not sell, you have no reportable gain or loss. A gain or loss is only reported on your tax return when you sell.
Timing is Key!
If you are thinking you can sell some investments, take a big loss, and offset your taxable banner-year income, think again! On your tax return, you first net your capital losses with your capital gains. If you still have a loss, only $3,000 can be used to reduce your earned and other income. But, you carry the loss forward to future years until it is fully used.
Long-term capital gains are taxed at a preferred tax rate. This rate is determined by your tax bracket, but it is lower than the tax rate for ordinary income. The rate ranges from 0 - 20%. Short-term capital gains are taxed at your ordinary income tax rate. Be sure to time your losses to net with short-term capital gains or other income and avoid long-term capital gains in that year. You don't want to waste the benefit of income-reducing losses to net against income that is taxed at a preferred rate.
Think you want to sell some investments, take the loss, and then repurchase at a lower price? Think again! There are wash sale rules. A wash sale occurs when you sell and repurchase that stock within 30 days. If you want to take a loss, then you must wait 31 days between the transactions. If you sell and buy within the 31 days it is considered a wash sale and does not generate an allowable loss.
As you can see, if the timing is right you can generate savings on your tax return. Securities transactions can be tricky - if you have any questions, feel free to contact us or your financial planner.