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Booyah Breakdown: Tax Twists

11/18/06 - 09:48 AM EST

F GM

Tracy Byrnes

Cramer does a ton of buying and selling. And while he says you shouldn't worry about the tax implications, there's a little arcane tax rule that rears its ugly head when you buy and sell too quickly.

So before you start doing your year-end tax-loss selling, analyze your holdings.

Clearly, you should sell the stuff that means nothing to you. Take the loss on your tax return and chalk the mess up to experience.

But what if you've got losers in your portfolio that you still believe in?

Take FordF. Say you bought the stock back in January 2004, when it was trading around $16. These days, it's hovering around $8.

But say you're a believer in the good ol' American company and believe a turnaround is coming. Though it would be nice to use that loss on your tax return to offset the other gains you made following Cramer's advice, you really want to stay in the stock.

Well there's a great tactic that will allow you to do both. There are two catches though: you have to heed the wash-sale rule, and you have to complete this trade by Nov. 28.

First, let's fully understand the wash-sale rule.

Think of a wash sale this way: You're at the racetrack, and you win $500 on your favorite horse in the third race. You believe you're on a roll, so you bet again. But you lose it all in the eighth race. The day turns out to be a wash, and you go home financially unaffected. (Your emotional situation is an entirely different story.)

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Tracy Byrnes is an award-winning writer specializing in tax and accounting issues. As a freelancer, she has written columns for wsj.com and the New York Post and her work has appeared in SmartMoney and on CBS MarketWatch. Prior to freelancing, she spent four years as a senior writer for TheStreet.com. Before that, she was an accountant with Ernst & Young. She has a B.A. in English and economics from Lehigh University and an M.B.A. in accounting from Rutgers University. Byrnes appreciates your feedback; click here to send her an email.

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