Wednesday, December 19, 2007

Tax Loss Selling

Do you still have some tech stocks lying around in your investment account from the boom days? Some of your stock positions might even be worth less than $100. What good could they possibly be now? The answer is that they might help out on your taxes.

When you sell an investment for more than you paid for it, you have made a capital gain, and you will have to declare this gain on your taxes if it is not in a tax-sheltered account, like an IRA in the US or an RRSP in Canada. If you sell an investment for less than you paid for it, you have a capital loss. Fortunately, each year you pay taxes on your net capital gain, which means that you get to subtract all your losses from your gains.

So, if you are going to have a net capital gain this year, you might consider selling one of those high-tech stinkers to create a capital loss to offset your capital gain. Take some time to think through all the relevant tax implications, though. For example, if your income is unusually low this year, you might be better off to pay taxes on your capital gains at a lower tax rate and save your capital losses for another year.

Don't forget to take into account all costs when deciding on the best course of action. Most people correctly take into account commissions, but not spreads. See this essay about apreads for details.

To take advantage of this idea for the 2007 taxation year, you need to sell the losing stock before the end of the year. To put it more precisely, the transaction has to take place before the end of the year. When you make a stock trade, the actual swap of stock for money doesn’t take place until 3 business days later. It is this day that has to fall in 2007 for your tax loss selling to work for this year.

According to the Times Colonist, the last day for 2007 tax loss selling in the US is Dec. 26, and in Canada Dec. 24. Because I prefer not to cut things too close, I usually do my tax loss selling well before the deadline. Update: An alert reader (Tom) found contradinctory information about tax filing in the US at Fairmark (see his comment below). According to Fairmark, stock sales can take place on 2007 Dec. 31 and still qualify for capital losses in 2007. To be safe, I'll stick to doing my tax loss selling before Christmas.

Although tax considerations are an important part of investing, don’t let taxes drive all of your decisions. It’s important to take a long-term view of your investment success and not be overly influenced by short-term tax considerations. That said, it seems sensible to save money on your taxes by getting rid of a $100 position in a stock you’ve tried to forget about.

2 comments:

  1. tom q1982tqn@yahoo.comDecember 26, 2007 at 4:39 AM

    could this be an error?
    http://www.fairmark.com/capgain/lastday.htm

    Trade Date Controls
    When determining what year you sold your stock, the trade date is what matters. This is the day the transaction took place on the stock exchange. If you contact your broker on the last trading day of the year, you can complete a sale in the current year if your broker executes the trade that day. On major exchanges, the last trading day is December 31 unless that day falls on a weekend.

    Settlement Date
    Stock market trades generally settle a few days after the trade date. This is the day shares and cash actually change hands. But the settlement date doesn't matter for purposes of determining when your sale took place. If your trade date is in the current year and your settlement date is in the following year, the tax law says you made the sale in the current year (year of the trade date).

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  2. Tom: That's interesting. I heard someone say this once, but I had never seen it in writing. The Fairmark site contradicts other information I've found.

    To be safe, I always do all my tax loss selling before Chrismas. I suppose that if I did hapeen to sell a stock on Dec. 31st, I would file in whatever way helped me more, but I would be prepared to be reassessed.

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