Turning Stock Losers Into Tax Winners

It takes a lot of devotion to be on the losing team -- especially when you know the team has potential. Take Cubs fans. They have held on for years just waiting for that team to make it to the World Series. Unfortunately, they're still waiting.

It's one thing to leave the stadium disappointed. But it's a much bigger deal when you start watching your retirement money dwindle away because your favorite stock holdings are in the toilet.

And while you may not want to abandon ship just yet, you could really use some losses on your tax return to offset any gains you many have generated throughout the year. Thankfully, there are some tax-advantageous tactics you can try before year's end that will allow you to stay devoted to your holdings and help your tax situation at the same time.

Dump the Losers

Your first option is to just sell those loser shares. Let's say you've been holding Dell(DELL Quote) for more than a year. You truly believe in the company, but you've watched the stock go from the low $40s to the high $20s, and your ulcer just can't take it anymore.

So sell it before the end of the year; that way you can use the loss on your 2005 tax return.

You do have some choices to make to keep your asset allocation intact. You could go out and buy a competitor, says Alan J. Straus, an attorney and CPA in Manhattan. Maybe, for example, Hewlett-Packard ( HPQ Quote) would work for you. Purchase an equivalent amount of shares, and you'll have the tech exposure you need plus the ability to use the loss from Dell on your tax return.

But what if you believe the company is going to rebound? Maybe you should just buy back those Dell shares?

Not so fast.

A pesky IRS rule says you have to wait 31 days from the time you sold the original lot before you can buy those shares back and account for the loss. Yep, that means a month with no Dell.