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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: of 121164  
Subject: Re: Stock Loss Tax Question Date: 3/16/2001 6:02 PM
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"Does it make sense to sell my current position at a tax loss (down about $1200) and purchase $5000 of QQQ in a month or later if I believe that QQQ will be at or below current levels?"

The tax experts are giving you technically correct advice. But have you done a serious risk/benefit analysis of tax loss selling with a stock you want to own in the long term? The bear market has made tax loss selling seem like the thing to do, but do the math.

1) Remember, you only get to write off your losses against your income, not against your taxes. How much of a write off for a short term capital gain depends on your federal marginal tax rate (tax bracket), as well as state taxes. Given the small amounts you are talking about, I'm guessing you are at most in the 28% bracket, perhaps even 15%. So your $1200 loss translates into only $336 (28%) or $180 (15%) savings on federal taxes you'd pay for 2001.

2) If you repurchase the same stock at a lower price than you originally paid, your basis is then lower, so when you eventually sell the stock, you have to pay that much more in capital gains taxes (plus state taxes). Again, exactly how much would depend on your tax bracket when you sell. If you sell for a short term capital gain and stay in the same tax bracket, you'll end up paying back the following year all the taxes you saved. If you hold long term, the numbers are more favorable, but you'll still pay more long term capital gains taxes than you would have with the original, higher, purchase price. Suppose you hold for five years and, at that time, you are in the 28% bracket or above (there will be tax changes by then), you'd pay 18% super long term capital gains rate, or an extra $216 on the same number of shares, for a net tax savings of $120. So, if you are now in the 28% bracket and are in the same bracket (or higher) in five years, your net savings is 10%. If you sell before 5 years it would be less. If you're now in the 15% bracket and you move up before you sell the stock, you could end up paying more in taxes than if you just held.

3) If you invest your tax savings from next year and do very well, say doubling your investment in 5 years, this makes the numbers more favorable to tax loss selling, but once you pay taxes, we're talking about something like 16% benefit instead of 10%. Probably less if you get more realistic returns.

4) So, the bottom line is, you are betting that the stock will not go up more than 10-16% between when you do your tax loss selling and when you repurchase it. If this is a company that you believe is a good long term investment that has dropped only because of the bear market, it could turn on a dime after the next rate cut or some piece of positive news. If you like the company, why take the chance for so little potential savings.
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