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Subject:  Re: On second thought, 2828 - Small Cap Issue Date:  1/27/2013  10:56 PM
Author:  warrl Number:  668639 of 875629

You sell your losers and somehow that helps you save money on your winners? So you don't have to pay over 15% in taxes?

It's like this.

You believe the global-warming hype and see an upcoming investment opportunity. The Mediterranean is going to be so overly warm nobody goes there, so you sell-short a beach resort in Italy; meanwhile the northern regions are going to warm up nicely, so you invest in some beach resort property in Greenland.

Well, Italy has an economic crisis plus an earthquake severely damages the beach resort right at the start of tourist season. And they had stupidly let their insurance lapse. The company is WIPED OUT, a complete loss - which, since you shorted it, is a complete win for you. You have a large realized capital gain that you're going to have to pay income tax on.

But it turns out that you're a mite early on your Greenland beach resort plans, and the property is now worth quite a bit less than you paid for it. On the other hand, you still believe in the concept.

So you can sell the Greenland beach resort property and suffer that loss - offsetting the profit you made by shorting the Italian resort. So you pay less income tax, possibly none at all. And you use the proceeds from selling that Greenland beach resort property to buy the property next door to it which also declined in value; so essentially you're trading in one Greenland property for a different but very similar Greenland property, and reducing your income-tax bill in the process.

(Note: I do not recommend any of the specific investments mentioned in this entirely-made-up example.)
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