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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 121180  
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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