Client Tip for October 2015: Individual’s Capital Gains and Losses
Individual’s Capital Gains and Losses
Year end is a good time to engage in planning to save taxes by carefully structuring your capital gains and losses. Suppose you lost money on stocks you sold in 2015 and have other investment assets that have appreciated in value. Before the end of 2015, you should consider the extent to which you should sell appreciated assets (if you think their value has peaked) and thereby offset gains with pre-existing losses.
Long-term capital losses offset long-term capital gains before they offset short-term capital gains. Similarly, short-term capital losses offset short-term capital gains before they offset long-term capital gains. Remember you may use up to $3,000 of total capital losses in excess of total capital gains as a deduction against ordinary income in computing your adjusted gross income. Any net losses in excess of the $3,000 can be carried over to future years.
Paper losses or gains on stocks may be worth recognizing this year in some situations. But suppose the stock shows a loss now but is also an attractive investment worth holding for the long term. There is no way to precisely preserve a stock investment position while at the same time gaining the benefit of the tax loss, because the so-called “wash sale” rule precludes recognition of loss where substantially identical securities are bought and sold within a 61 day period (30 days before or 30 days after the date of sale). Thus, you cannot sell stock to establish a tax loss and simply buy it back the next day.
Careful handling of your capital gains and losses can save you substantial amounts of tax.