Selling a stock in a losing position to offset a gain

Author: Steven posted in Investing basics tagged with Investing 101, Taxes

Have you ever noticed that at times the stock market depreciates as the end of the year approaches? This occurs because investors are getting rid of their losing positions in order to reduce the amount of taxes to be paid on their capital gains.

When you sell stock for a profit you will have to have pay capital gains taxes on it. The amount you will have to pay, in percentage terms, will depend on how long you have held onto the stock. If you kept it for a period greater than one year, you will have to pay long-term capital gains tax, which is 15% if you are in a 25% or higher income tax bracket, and 0% if your income tax bracket is less than 25%. If instead you kept the stock for less then you will have to pay short-term capital gains tax, which is the same of your ordinary income tax rate.

For example, let’s assume that you bought 100 shares of a company at a price of $10 per share in February and that after 4 months you decide to sell them because the share price has appreciated to $15. This would result in a profit of $500 on which you would have to pay taxes at your ordinary tax rate as it qualifies as a short-term capital gain (you held onto it for less than one year). In order to reduce the amount of taxes that you would have to pay (or not pay any at all) on such capital gain, you could decide to sell shares of another company you own at a loss in order to offset the $500 profit.

The maximum amount of capital losses that you are allowed to deduct on your tax return is $3000 per year. If your capital losses are greater than this amount, the difference will be carried on to the future year tax returns.

If you decide to sell stock shares at a losing position in order to offset capital gains, be aware that the IRS does not allow you to buy back the shares within 30 days. Such rule is known as the “Wash Rule”.
We strongly suggest that you get in contact with a tax consultant for detailed information.

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