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Harvest those capital losses!

December 18, 2009

Just as a fair chunk of Iowa's corn crop is still in the fields, lots of us have tax losses waiting to be harvested in our taxable investment portfolios. While farmers have to wait for the deep snow to go away to get their corn, you can harvest your tax losses with a call to your broker, or the touch of a cursor on your E-trade screen.

Remember, individuals can deduct capital losses to the extent of your capital gains, plus $3,000. If you have sold stock at a gain this year or have capital gains from mutual fund distributions, tax on them is optional to the extent you can sell stocks at a loss before the end of the year. It's a gimmee deduction if you keep a few tips in mind:

- You have to take the loss in a taxable account. A loss in an IRA or 401(k) plan doesn't help you.

- Normally the "trade date" is the effective date for tax purposes, so you can sell a stock as late as December 31 this year and still deduct the loss on your 2009 1040.

- If you have a loss on a short sale, the tax law treats it as closing on the settlement date, not the trade date, so you can't wait to the last minute to close a short sale to get a deduction.

- Watch out for the wash sale rules. If you buy the same stock within the 30 days preceding or following the sale of a loss stock, your loss is disallowed. This is true even if you sell from a taxable account and buy in an IRA.

Another installment in the Tax Update's 2009 year-end tax planning series!

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