I used to think that there was nothing wrong with realizing capital losses in a year where you couldn’t use them because they can be carried forward indefinitely. However, I discovered a scenario where I wish I had held on to some loser stocks.
Suppose that in 2009 your spouse sold some stock and realized a $5000 taxable capital loss. Then in 2010 your spouse sold more stock and realized a $5000 taxable capital gain. Suppose further that your spouse’s other 2010 income is very low. You might think that you will get full value for the spousal deduction. However, this isn’t the case.
The spousal deduction is based on net income rather than taxable income. The carried forward capital loss does not affect net income. Rather it gets subtracted from net income to calculate taxable income. So, the $5000 of capital gain income reduces your spousal deduction.
If both blocks of stock had been sold in 2010, the capital gain and loss would offset each other and you’d have received the full spousal deduction. So, this is one scenario where it makes sense to hang on to a loser stock until you can actually make use of the capital loss.
Michael, somewhat of a specific event, sounds like it happened to you or a “friend”? If the husband in this case has some capital losses he cannot utilize, you may be able to mitigate this problem, if you are aware it is coming. The husband could sell his loser stock and then the wife could repurchase the stock within 30 days. Under the superficial loss rules, his loss would be denied, but that loss would be added to the cost base of the wife’s shares. If she then waited at least 31 days and sold, she would essentially realize the husband’s capital loss and could use it against her capital gain and you then don’t have the net income issue you currently have. However, you have then wasted a capital loss that could be used in the future by the husband and the wife still has the original capital loss. Would have been easier as you say to sell the loss stock in the same year as the gain, but live and learn.
ReplyDelete@Mark: Thanks for that idea. It would definitely work well if you see the problem coming. But as you say, it won't work if the sale of the loser stock is well in the past.
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