Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®
Co-CEO and Founder oXYGen Financial, Inc.

I’ve been in the business almost 18 years, and I can remember scenarios around stock losses like this back in the

Internet bubble of 2000. When the Internet stocks busted, many people were asking should I hold onto these stocks, or is this time for me to consider dumping my stock and taking some losses?

One of the things that I talked about at that time and recommended that clients consider is the notion of something called a “wash” sale. This is really all about the notion of you still wanting to hold the stock on a long-term basis, but be able to lock in some of your long-term losses so you can offset capital gains. As always, I recommend talking to a qualified accountant or CPA before you make any financial decisions.

So what happens when the value of your stock goes down, and you get that sinking feeling in your stomach that you know that you’ve lost money. You’re not sure exactly how to take the losses, and you are sure that you want to hold onto the stock for the long-term. In one way it’s good because you can really control the timing of your overall deduction and loss. You generally want to take the benefit when it’s greatest when your stocks are down. The problem is sometimes that you’ve got a conflict in your head. You really do want to deduct this loss but you actually like the stock. An example may be one of the financial stocks today or an automotive stock that you are emotionally fully invested in at this time. That’s where the “wash” rules come into place, and here’s the basis of how it works.

The “wash” rule has several steps and consequences. One is that you need to sell your stock and not replace it with the same stock within a 30-day time period. Essentially, what the tax rule is saying is that you can’t sell your stock and then the next day buy it back and claim the loss. You’ve got to wait at least 31 days to be able to get back into a position to purchase stock again. Otherwise, you’re going to have your loss be disallowed and it’ll be added to the basis of the replacement of the stock.

Let’s say, for example you own Sirius Satellite Radio. You bought it at $5 a share and now it’s down to 25 cents a share and you’ve got a $4,000+ loss. What you could do is sell the stock today. You would have essentially a $4,000+ loss that you’d be able to claim on your tax return and then after 31 days you would buy back the stock. This way you could lock in a loss, but you would actually own the stock on a long-term basis. One of the risks you may ask yourself is well what happens if the stock goes up dramatically in the next 30 days. That is one of the risks of the timing strategy like this.

One of the other benefits of this strategy I talk about with clients is if you can match these losses against gains from other securities that you hold.

As it stands, when you take those tax losses you can match an unlimited amount of long-term capital gains against an unlimited amount of long-term capital losses. If your losses exceed your gains in any one tax year as the current tax loss stands you can take out $3,000 of tax loss against your ordinary income. Any additional losses you would be able to carry forward for future years to use as losses to match against other capital gains. So, one of the questions you should ask yourself right now at the end of the year is:

A. Do I want to hold my stock on a long-term basis?

B. Is this an opportunity for me to lock in some long-term capital losses?

and

C. Do I have other gains I can match this against at this time?

As always, consult a qualified CPA or accountant before any final decisions. So start getting out your laundry and consider which items may need to be “washed” before year end.

TED JENKIN IS SECURITIES LICENSED THROUGH INVESTACORP, INC. A REGISTERED BROKER DEALER MEMBER FINRA, SIPC. ADVISORY SERVICES OFFERED THROUGH INVESTACORP ADVISORY SERVICES, INC.

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