I have a big tax bill coming up in April 2009 for a bunch of company stock that got sold out from under me when the company I work at was acquired.
So I’m looking for ways to reduce the amount of taxes I have to pay and had this idea: Sell the stocks that I currently have a loss on to realize that loss. Put the proceeds from those stock sales into an index fund. Use the realized loss to reduce my tax bill.
My reasoning: the stock market has really tanked and many of my stocks are in the red. Now I’m aware (as I’m always telling my friends) that you don’t have a loss until you sell. And selling in a market downturn is to be avoided because you then “lock in” your loss. In this situation, though, I will sell the stocks, but then immediately put that money back in the market. So I will **still **have my money in the market and benefit when the market picks up again – and also benefit from realizing the loss and reducing my tax bill.
Another benefit for me is simplifying my investments. I find I don’t have as much interest in following the individual stocks anymore, and moving the money into a “buy it and forget it” index fund will simplify things.
One possible problem: a lot of my gain will be short-term capital gains, but most of the losses I would realize in this idea would be long-term capital loss. IANACPA but my reading of the tax form seems to say that short-term losses are subtracted from short-term gains, long-term losses are subtracted from long-term gains, then the “net” from the short- and long-term results are added or subtracted. Anyone see a problem with my reading of the tax form?
This seems like a reasonable thing to me. Anyone see a big downside to this? Would I be really screwing up if I did this?
I’m not a financial analyst or tax advisor, but my understanding is that people do what you’re suggesting all the time.
There are a few caveats I can see:
don’t buy back the same stocks you sold, or it’s a “wash sale” and gets a bunch of special rules (you’re not planning to).
there’s a limit to how much loss you can claim.
you are locking in losses when stocks are a significant low. You’re giving up not only the original cost of these stocks, but any future profits, which may be a fool’s game for stocks with decent fundamentals. So I’d get rid of “loser stocks” first: ones you’ve held for long periods of time and have only declined (as opposed to have declined since 2007). If the stocks your selling have large upsides, I’d look at other solutions first.
I’m inclined to say “see a professional,” especially if your company provides the services of professionals free (many do as a matter of course, an underutilized benefit, and others do right after buyouts as a benefit for the employees affected).
Very true. I think the limit is 3,000 in a year. Check with the IRS though - I’m pretty sure that doesn’t apply to losses which offset gains. For example you’ve sold (or had yanked from you) shares of company A which cause a 10,000 gain, and you sell shares of company B which cause a 11,000 loss. You can take the 11,000 loss (well, 1,000 net loss for the year). If B lost 15,000, you’d take a 3,000 net loss for the year, then next year you’d take a 2,000 loss carried over. This is how I seem to recall TurboTax handling it for us a few years back.
True. You’d want to make sure that whatever other company you invest in has potential to rebound at least as well as the losing stocks.
I wonder if it mightn’t be a good idea (depending on your financial situation) to dump some of those funds into your 401(k) or Roth. If your company doesn’t have a specific limit on how much you can contribute, you’ve still got a few weeks to sell the losing stock, bump up your 401(k) withholding to, say, 60% of your paycheck, and really help your bottom line tax-wise. Do the math first though!!!