Maximize Your Sale of Stocks at a Loss

Physician's Money Digest, May 15 2003, Volume 10, Issue 9

So the market was bullying along and,based on some hot tip, you purchased awonderful stock that was supposed to goto the moon. Instead, it plummeted like ashooting star. Now what? Is there any wayto salvage anything from your loss? Thefollowing are a few strategies you shouldknow to maximize your stock losses:

Strategy 1: Use stock losses againstany capital gains. If you have any stocksor other capital items that have gone up invalue, you can use the loss against anygains. Thus, you can sell stocks, real estate,or even collectibles at a gain and help offsetthe loss against these gains.

Strategy 2: Identify which stocksare sold. If you purchased the same stockat different times and have a differentbasis for these purchases, tax law deemsthat you sold your latest purchases first.

Example:

John purchases 100 shares ofUnited Air stock in January at $20 pershare and 100 shares of United Air at $15a share in March. If John were to sell 100shares at $10 per share, the stock used inthe sale would be the stock purchased inMarch. This would result in a $500 loss. If,however, John instructs his broker to sellthe shares purchased in January, his losswould be $1000, since his basis for thestock loss was $20 a share.

Strategy 3: Employ techniques toavoid the dreaded wash-sale rule. Taxlaw notes that if you sell a security (eg,stocks or bonds) at a loss, you can't purchasethe same stock or bond within 30days of the loss, or you would lose the loss.

You can either wait 31 days after thestock sale to buy back the same stock oryou can buy back a different security withinthe 30-day period. If, in the above example,you purchased United Air stock withinthe 30-day period of selling the stock, youwould not be able to deduct the loss.However, you can buy back a differentsecurity. Thus, if you buy back Continentalstock, you would be able to take the losson your United Air stock. With bonds, youcan buy back a bond from the same issuerif it has either a different maturity or a differentinterest rate.

Example:

Strategy 4: Where all else fails,deduct $3000 of capital lossesagainst any other form of income. Ifyou have a short-term loss (eg, stocks orbonds held for less than 1 year), you maydeduct up to $3000 of the stock lossagainst any form of income that youhave, such as dividends, interest, rents,wages, etc. Any excess is carried over foreverand can be used in future years subjectto the same limitations. Mary has a short-term capitalloss on her stock of $10,000. She maydeduct $3000 of the loss against herwages. This will leave $7000 of loss thatcan be carried over to next year andused against next year's gains. If thereare no capital gains next year, she canuse $3000 of the loss against her otherincome, like wages.

Sandy Botkin, a former IRStax attorney and trainer of IRSattorneys, is CEO of the TaxReduction Institute in Marylandand the author of LowerYour Taxes—Big Time! (McGraw-Hill; 2003). He travels nationwide lecturingon tax planning and audit-proofing techniquesfor small and home-based businesses.He welcomes questions or comments at 301-972-3600 or www.taxreductioninstitute.com.