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Author: TrevorJ Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121061  
Subject: Managing Year-End Capital Losses Date: 12/15/2001 12:12 PM
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Like may folks, I am holding several stocks on which I would take a significant loss if sold now. I am thinking of selling some of these, and replace them with different stocks within similar segments to maintain the overall balance of my portfolio. This would give me on overall tax loss for the year well in excess of the $3,000 which can be offset against income.

Am I right in thinking that there is no limit to the amount of loss which can be carried forward to future years to offset (hopefully) future gains? Is my course of action wise (or Wise?)
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Author: dj111 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 56031 of 121061
Subject: Re: Managing Year-End Capital Losses Date: 12/15/2001 1:15 PM
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Am I right in thinking that there is no limit to the amount of loss which can be carried forward to future years to offset (hopefully) future gains? Is my course of action wise (or Wise?)

Yes. This TMF article explains some of the details:
http://www.fool.com/school/taxes/2000/taxes000107.htm

Although the techniques probably aren't applicable to your specific situation, you may want to look over this Forbes article:
http://www.forbes.com/forbes/2001/1210/186.html

David Jacobs

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 56035 of 121061
Subject: Re: Managing Year-End Capital Losses Date: 12/15/2001 2:22 PM
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Am I right in thinking that there is no limit to the amount of loss which can be carried forward to future years to offset (hopefully) future gains?

Yes. But you do have to live long enough to claim them. ;-)

Is my course of action wise (or Wise?)

Depends. Selling your shares is a financial decision, not a tax one. In your opinion, is it time to sell these shares? If so, I would recommend doing so before the end of the year rather than after, because of the tax reasons you have noted.

If it is not time to sell, if you want to continue to own these shares for the long-term, then you are playing a short-term game to potentially get some tax benefits. You have to balance the tax benefit against the possibility that the shares will go up while you are out of the stock (to avoid invoking the wash sale rules). It's a gamble rather than an investment.

--Peter

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 56037 of 121061
Subject: Re: Managing Year-End Capital Losses Date: 12/15/2001 8:03 PM
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"I am holding several stocks on which I would take a significant loss if sold now. I am thinking of selling some of these, and replace them with different stocks within similar segments to maintain the overall balance of my portfolio. This would give me on overall tax loss for the year well in excess of the $3,000 which can be offset against income.

Am I right in thinking that there is no limit to the amount of loss which can be carried forward to future years to offset (hopefully) future gains? Is my course of action wise (or Wise?)"

Trevor, don't forget (as most seem to) that when you sell one stock at a loss than purchase another (or wait a month and try to repurchase at the same price), you will later pay capital gains from a lower basis. For, example, if you sell one stock now for a $20,000 loss, buy something else, then sell that in 5 years for a $20,000 gain, all you've saved is the difference of $3000 per year at your marginal tax rate and the 18% rate on the difference of what's left on the gain after subtracting your remaining loss ($15,000 left x 18%=2700). If you're in the 30% bracket, you'd have saved $4500 on taxes over the 5 years (better if in a higher bracket, less if lower), for a total of $1800 savings, plus interest. If it's more than $20,000 loss, you'd still only save $4500 in 5 years. And if you cash in other gains sooner, you'll save less.

Bottom line, when you factor in the lower basis, tax loss selling is only Foolish if you want out for reasons other than taxes. If you think you've still got a good long term investment that's been beat up in the bear market, don't sell unless you think you've got something that will do as well going forward from here as what you already own.

I just unloaded a NASDAQ fund and put the money in an equivalent, because I think from here that's my best chance to recover my losses (i.e., that the NAZ will outperform the S&P over the next few years). I'm going to get out of the new investment as soon as I think the NAZ has caught up (lot of short covering), because I don't want to be there long term. I figure at most 5 years, maybe less. I figure I'll save a little in the difference between marginal and 20% rate, but I also switched because the fund was too expensive (took advice of the Wise: never again). If I had faith in the fund, switching for the tax loss wouldn't be worth it.

On the other hand, I'm making another fund switch where I intend on keeping the new fund indefinitely. In this case, I get to keep deducting loss from income at $3000/year until I run out or until I use the loss to cover the capital gains on a stock I would be selling anyway (for a gain, knock on wood). I'm, in fact, doing double switch, one part of which is a pure tax loss ploy between 2 Vanguard funds I'm happy to keep. The other is getting out of another fund with too high expenses.

Anyway, before you make any decisions, caluculate what happens from your lower basis, and I think you'll conclude that tax loss selling only makes sense if you want out of an investment for other reasons. Even if you're looking to replace with equivalents within the same segment, it's pretty hard with individual stocks to find ones that are close enough to be sure (unlike my pure switcheroo with closely tracking index funds).

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Author: TrevorJ Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 56089 of 121061
Subject: Re: Managing Year-End Capital Losses Date: 12/17/2001 9:44 PM
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Thanks, David, Peter, and Lokicious for your thoughtful replies. Here's my conclusion on the subject of taking year-end losses:

1. It makes sense under certain circumstances to offset gains for the tax year by taking losses up to the limit of the $3,000 offsetable against income each year.

2. It needs to be done by either selling stocks which you want to dump anyway, or managing a swap with similar, but not substantialy identical, stock (so as to avoid a wash sale), yet maintain portfolio balance.

3. The benefit of the latter may be relatively small, since you will have a lower basis in any replacement stock, which will eventually catch up with you.

4. Beyond the $3,000 there is absolutely NO benefit in creating a loss to carry forward to future years, unless you specifically want to get out of your position anyway.

My intention now is to do nothing, since I have (unfortunately) already more than offset my gains for the year!

Thanks again.

Trevor.

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 56093 of 121061
Subject: Re: Managing Year-End Capital Losses Date: 12/17/2001 10:49 PM
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Trevor,

I wouldn't say there's no reason to take a carry-over capital loss: you can still get the difference between your marginal rate and long term capital gains rate on $3000/year. It's just when you factor in the lower cost basis on which you will eventually have to pay capital gains, the advantages of the tax loss are a lot less than most people think, especially if you're not talking about something (like an index fund) that you may hold onto for many, many years before paying Uncle Sam back.

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