Time to talk about how to avoid the most common pitfall that could cause you to lose a capital loss deduction.
Many people are happy to have a few capital gains from securities sold during 2009. It is a welcome relief to see a little black ink after 2008's red tide. But nobody is happy to pay tax if they can legally avoid it. If you have losses on stocks that you still hold, you may consider selling in order to have a loss to reduce your gain. When you file your 2009 taxes your capital gains and losses will be netted out against one another. So if you have only gains now, a loss incurred before 12/31/09 will reduce the gains and reduce your tax bill. But before you sell just to get a loss, consult your advisor: is your loss likely a temporary one? Are your securities an important part of your financial plan? Do they generate needed income? Those are good reasons to pause before you sell. But if you have an investment that has gone bad and may stay that way, it's best to realize it and sell to get your deductible loss. Now, about that common pitfall. If you expect your losing investment to rebound in the future it may make sense to sell now to get a deductible loss and then buy back your shares. But beware the "wash sale" rule: you may not deduct a capital loss if you buy back your securities within 30 days of sale. If you get out, you have to stay out for 30 days. That rule is the cause of much scrutinizing of calendars this time of year.
That's plenty of obscure tax jargon for a Monday morning. Tomorrow I'll wrap up my yearend tax posts by magnifying some IRS fine print.
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).