Money Talk

If you’re like most investors, 2001 has been a year you’d just as soon forget. Even before the tragedy in September, the stock market had been slumping — and it’s been volatile ever since. As a result, you may be considering selling some stocks at a loss this year to improve your tax situation.

Your investment losses are tax-deductible — to a point. You can use your losses to offset any capital gains you may have achieved, plus $3,000 of income. This capability can prove quite useful to you, because even when the markets are down, you can still rack up some capital gains by selling investments that, over time, have increased in value. Capital losses also may offset year-end capital gains distributions you may have received from your mutual funds.

 To claim a capital loss, however, you must actually sell the stock — and you might not really want to part with it. You may believe that, despite its current decline, this stock still has good prospects for the future and fits in well with your diversified portfolio. So, can you sell the stock to establish your tax loss, then buy it back at a lower price?

It’s not that simple. In the eyes of the IRS, if you sell a stock and repurchase it — or if you buy a "substantially identical" security — within 30 days, you’re making a "wash sale," and you won’t be able to deduct any losses resulting from this transaction. And this rule applies to purchases you make within 30 days before or after you sell your stock. 

Read the entire article in the February 2002 issue