Find Your Money-Losing Investments Now
NEW YORK (TheStreet) -- All of a sudden its December -- time to harvest those tax losses.
If that observation has you scratching your head, heres a quick primer.
Federal capital gains taxes are charged for profits made in taxable accounts, which include most investments that are not in tax-deferred accounts such as traditional IRAs and 401(k)s.
Tax bills are triggered when you sell an investment at a profit. If you bought a share of stock for $100 and sold it for $200, the $100 in profit would be taxed in the year the stock was sold. If the stock had been owned for longer than one year, the maximum long-term capital gains tax rate is 15% (or 20% for people with large incomes). If the stock had been held for a year or less, the gain would be taxed at the short-term rate, which is the same is your income tax rate, anywhere up to 39.6%.Of course, most investors at one time or another have investment losses as well. So when you do your tax return the losses are subtracted from the gains to come up with a net gain or loss. Losses, then, can reduce or eliminate your taxes on gains. And if losses exceed gains, they can be used to reduce your taxable income by up to $3,000 a year, or they can be carried forward to be applied against capital gains or income in future years. before the tax year ends Dec. 31. It sounds simple, but not all losers are created equal. Some, of course, have bigger losses than others, making them more valuable at tax time. That would seem to make them better candidates for year-end selling, but theres a catch: What if the investment were to rebound? By selling, you could miss out on gains that might in the long run be more valuable than the tax loss. Perhaps you could sell the holding and buy it back? Well, the IRS is on to that gambit. A regulation called the wash-sale rule prohibits taking the loss if the same security, or one much like it, is bought within 30 days of the sale. You could, of course, buy the security back after the 30 days have lapsed, thereby preserving the tax loss from the sale, but youd miss any rebound that came during those 30 days.
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