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GOT GAINS? LET YOUR LOSERS GO

December 14, 2005

Had a good year in the stock market? You're not alone this year. If you're like the rest of us, you may have a few clinkers in the portfolio, too.

If you have sold stock from your taxable portfolio at a gain, it's time to unload some losers. Otherwise you are choosing to pay extra tax, and who wants to do that? A few things to keep in mind:

-We're only talking about your taxable portfolio here. Anything that happened in your 401(k) or IRA stays in your 401(k) or IRA.

-Capital losses are deductible to the extent of capital gain, plus (on 1040s) $3,000.

-Short-term and long-term losses can offset both types of capital gains. Short-term losses are first netted against short-term gains before counting against long-term gains, and vice-versa. If you have both types of gain, offset your short-term gains with your short-term losses first, because net short-term they are taxed at ordinary income rates.

-Don't wait until December 31. If you're broker is somewhere warm for the bowl games, he may not get to your sell order as quickly as you might like.

-Watch out for the "wash sale" rules. If you have losses in, say, GM, you can't sell part of your GM portfolio and recognize the loss to the extent you purchase other GM shares in the prior 30 days or the subsequent 30 days.

-If you have losses on a short position, remember that the settlement date, not the trade date, is the date the losses count -- so don't wait to take short losses at the last minute, even if your broker isn't leaving town.

UPDATE: 12/27/2005 A member of a Yahoo finance discussion group refers to this post, saying:

"I think that's only if you sell for a profit. A loss goes by the settlement date."

I should clarify: when I refer to a "short" position, I mean a classic short sale, where stock is borrowed in anticipation of a decline in value; if the short seller is correct, he profits from the price decline by repaying the borrowed stock with cheaper shares. If the stock price goes up, the short-seller has a loss; such a loss is recognized when the short sale is settled.

In a normal "long" position -- where stock is purchased in hopes that the stock price will rice -- the trade date is the date of the loss for tax purposes.

This is another installment in our 2005 year-end planning series.

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