Funds as 'Placeholders' in Tax-Loss Sales

That stock you own. The one that's been stubbornly ignoring the bull market, and your repeated pleadings, and sinking like a stone all year. You know the exact moment when it's going to turn around. It will be the day after you sell it to book the tax loss.

It's Murphy's Law, Wall Street-style.

That will be the moment when the company finally says business has turned the corner. Or that the dismal chief executive has at long last been ousted. Or that Bain Capital has arrived with a fat, juicy takeover bid.

And after all that selling pressure, it probably won't move just 10 cents. You'll see dollars slapped on the price within moments. And you won't be on board. It's a problem.

Those tax losses should come in useful this year. If you're a typical investor in stocks, bonds or funds, you'll be looking at some capital gains thanks to this year's rising market. But under IRS rules, you can't just sell a failing share, book the loss against your capital gains for the year, and then buy the stock back. You have to wait 30 days, sitting on the sidelines, before repurchasing the stock.

That can be an agonizing wait. Just what you don't need for the holidays. The IRS says that you cannot sell an investment and park the money in a "substantially identical" one for 30 days. That includes a contract to buy that investment -- so you can't sell the share and buy a call option on it.