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This week's stock market debacle is no doubt painful for you and your portfolio. But there are a few things you can do now to turn your losses into something positive come tax time next year.
If your darling stock has tanked but you still believe in its future, then go out and buy more of it.
That's right. Buy more. It's called
doubling up, and it can ease your pain in two ways. It creates a tax loss that you can use to offset some of your gains, and it lowers the cost basis in your tumbling stock.
Here's an example: Let's say you bought 100 shares of
at 100, and you think it'll bounce back. Buy another 100 shares at its current price, 85. Wait 30 days and sell your original shares of Microsoft that you bought for 100.
Why wait? The
wash-sale rule requires a 30-day wait before you can buy back the same security, or the tax loss will be disallowed. So when you sell on the 31st day, assuming the stock hasn't rocketed, you will have generated a tax loss that you can use to offset future capital gains. The best part: You're still holding the same number of shares, but now at a lower cost basis.
Another way to take losses and avoid the wash-sale rule is to swap positions. First, sell your loser to generate a tax loss. Then, buy another stock similar to the one you just sold. You get the loss, but you don't materially alter your portfolio's allocation. Wait the requisite 30 days and swap back to your original position, if you want to, recommends Ted Tesser, trader tax specialist and author of
The Trader's Tax Solution. "You'll end up with the exact same portfolio as you had a month ago, but you'll have a tax loss."
Another option: Swap your stock with an exchange-traded security that has the same stock in it, or closely mirrors the movement of the industry you just sold. For example, sell
Merrill Lynch Internet HOLDRs
. Thirty one days later, do the opposite if you want to get back to your original position.
If your technology-based mutual fund is in the toilet, then just switch funds. You generally don't have to sweat the wash-sale rule with mutual funds unless the two funds have exactly the same securities in the same proportion, says Gail Winawer, a tax securities partner at
American Express Tax & Business Services
. So unless you buy back the exact same shares in the fund you just sold, it's almost impossible for most nonindex-tracking funds to trigger the wash-sale rule. If you want to get out of one technology fund that is tanking and into another one that isn't (if you can find one), go ahead.
This strategy also applies to exchange-traded funds.You can sell your shares of the
and buy a Nasdaq-based tech fund without triggering the wash-sale rule.
But beware: If you plan to sell mutual fund shares, put a hold on any reinvested dividends or capital gains because they'll count as an acquisition and trigger the wash-sale rule. In other words, if you sell 100 shares today at a loss, but dividends on your remaining shares are reinvested next week, the amount of loss equal to the reinvestment will be disallowed by the wash-sale rule.
Mark to Market
If you qualify as a
trader, consider making the
mark-to-market election on your 1999 tax return. This election requires that you value your holdings as though they were sold at fair market value on the last business day of the tax year, but it also allows traders to take an unlimited amount of losses. (Remember, an investor's losses are limited to the amount of capital gains incurred, plus an additional $3,000 a year.) Best of all, if you mark to market, the wash-sale rule doesn't apply to your trades.
Granted, once you make this election, you are stuck with it unless you appeal to the
Internal Revenue Service
. "But with the election, you can sell the stock, take the loss and buy it right back," says Tesser.
With your holdings in the dumps, now's a great time to give them away to your children, suggests Winawer.
Remember, every year you and your spouse can each give up to $10,000 to a child or anyone else without incurring any
gift tax. If the value of your favorite stock is down, that means you can give away more shares.
Here's a better reason to give your child, at age 14 or older, some shares. Children over age 14 are generally in the 15% tax bracket, and that means their long-term capital gains rate is 10%, compared with 20% for many adults. Eventually, when the stock bounces back, you can sell some of those shares on your child's behalf and owe only half as much in capital gains. (Children under 14 are subject to the kiddie tax. That means, they pay taxes at the same rate as their parents do on investment income over $1,400.)
But Not Too Charitable
the best time to give stock to charities, says Winawer. Why? Because the value of the stock you are contributing is lower, so is the corresponding charitable deduction. So be selfish for now and worry about yourself and your family. The market no doubt will swing back and create an opportune time for charitable giving.
For more tips on getting rid of your gloomy portfolio, read this previous
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