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Author: Errigal Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 120800  
Subject: Selling stock at huge loss, tax implications Date: 12/23/2008 12:17 PM
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As the end of year looms, I'm trying to accept the fact that investment account is only worth of fraction of what it was a year ago. Two worst stocks for me: Fannie Mae (FNM) and Sirius (SIRI). I was in hospital from early September when things really went sour and didn't even want to look at the damage. I'm guessing there is zero possibility that either stock will recover.

If I sold off some of these stocks before year's end, I read somewhere that I could claim $3,000 of the loss against ordinary income. Is that correct? There is also something about carrying over additional loss to subsequent years, but probably no real advantage to selling all shares of both now.

I usually do my own taxes using Turbotax, would the process be too involved for me to handle this myself in 2009?
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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 103141 of 120800
Subject: Re: Selling stock at huge loss, tax implications Date: 12/23/2008 1:38 PM
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If I sold off some of these stocks before year's end, I read somewhere that I could claim $3,000 of the loss against ordinary income. Is that correct? There is also something about carrying over additional loss to subsequent years, but probably no real advantage to selling all shares of both now.

First you net all your Schedule D transactions, including mutual fund cap gain distributions. If the bottom line is a loss you can apply $3,000 to that year's return, carrying forward any excess to the following year's Schedule D, where the process repeats.

I usually do my own taxes using Turbotax, would the process be too involved for me to handle this myself in 2009?

No.

Phil

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Author: Errigal Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 103142 of 120800
Subject: Re: Selling stock at huge loss, tax implications Date: 12/23/2008 2:03 PM
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Thanks Phil:

I won't have any gains. Bottom line will definitely be a loss.

I'm presuming I must sell by 31 Dec 2008 to claim the loss on my 2008 return.

Now I need to decide what to sell. I presume there is no merit at this stage to holding onto Fannie Mae. I'm down 98.91% there on my purchase price. Bought at $55.30/share, today's price is $0.60/share.

In the case of SIRI, I originally bought shares of both XM and SIRI and stupidly added to both as shares dropped. With the merger, XM shares were transferred to SIRI, so calculating the loss would become more complex with that if I only sold some of the shares.

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Author: Mark12547 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 103143 of 120800
Subject: Re: Selling stock at huge loss, tax implications Date: 12/23/2008 2:56 PM
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I'm presuming I must sell by 31 Dec 2008 to claim the loss on my 2008 return.

Yes. What matters is the transaction date. If you are going to sell, don't cut it so close that you end up with the transaction being entered in 2008 but the actual trade date lands in 2009 if you want to take the capital loss in 2008.

I won't have any gains. Bottom line will definitely be a loss.

Maybe not from this year. But remember that net losses (minus the $3,000 you use this year to offset ordinary income) get carried forward to next year, and next year you would have to calculate your net gains and losses with this year's carry forward going into those calculations, up to $3,000 of net losses offset income for that year, and the net losses after that carried forward to the following year.

So while you might not be consuming losses by this year's gains, you might be doing so in some future year. If not, I can tell you from personal experience that it is nice having the $3,000 offset of income from capital losses--I have been enjoying this for several years, but in a year or two I will have consumed my capital losses.

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Author: Crosenfield Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 103144 of 120800
Subject: Re: Selling stock at huge loss, tax implications Date: 12/23/2008 7:41 PM
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This isn't quite right. If the order to your broker is placed by Dec 31, it counts for 2008 even if the actual trade isn't complete until 2009.

Still, no harm done by biting the bullet now.

OP can learn a rule: Do Not Cost Average Down. You bought the stock because you thought it would go up. It didn't. There is something about that stock you didn't know, or perhaps were decieved. Don't make matters worse by buying more. Buy a different stock you hopefully understand better.

One of the rules from the legendary Magellan manager Peter Lynch: If he could not explain what a company does to a 3rd grader, using a crayon and a sheet of paper, he didn't buy it.

Best wishes, Chris

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Author: CABob Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 103146 of 120800
Subject: Re: Selling stock at huge loss, tax implications Date: 12/23/2008 9:30 PM
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If the order to your broker is placed by Dec 31, it counts for 2008 even if the actual trade isn't complete until 2009.

Is this correct????

Bob

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 103147 of 120800
Subject: Re: Selling stock at huge loss, tax implications Date: 12/23/2008 9:31 PM
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This isn't quite right. If the order to your broker is placed by Dec 31, it counts for 2008 even if the actual trade isn't complete until 2009.

This needs some clarification. There is the trade date, which is when the order is executed, and the settlement date 3 days later. For tax purposes the trade date rules. If you submit an order after the market closes 12/31/2008 and it isn't executed until 1/2/2009, it's a 2009 transaction.

Phil

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Author: CABob Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 103149 of 120800
Subject: Re: Selling stock at huge loss, tax implications Date: 12/24/2008 12:49 AM
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There is the trade date, which is when the order is executed, and the settlement date 3 days later. For tax purposes the trade date rules. If you submit an order after the market closes 12/31/2008 and it isn't executed until 1/2/2009, it's a 2009 transaction.

Suppose you put in a limit order to sell, good until cancelled during market hours on 12/31/08 and the order does not execute on 12/31, but, does execute on 1/2/09?

Bob

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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: 103150 of 120800
Subject: Re: Selling stock at huge loss, tax implications Date: 12/24/2008 12:59 AM
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Suppose you put in a limit order to sell, good until cancelled during market hours on 12/31/08 and the order does not execute on 12/31, but, does execute on 1/2/09?

Then the trade date is 1/2/09 and you report the sale on your 2009 tax return.

The order date is immaterial. The settlement date doesn't matter. It's the trade date that controls when you report the transaction.

--Peter

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Author: foo1bar Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 103151 of 120800
Subject: Re: Selling stock at huge loss, tax implications Date: 12/24/2008 2:53 AM
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The order date is immaterial.

I agree - there is a reason it is called "good until cancelled".
You can cancel it -and there would be no trade.
If on 12/31/08 at 11:59PM you could cancel the order, and have no trade happen, then it really didn't sell in 2008, did it?

Same thing applies if you're calculating if it's short or long term - it's the trade execution dates that matter.

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Author: bacon Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 103154 of 120800
Subject: Re: Selling stock at huge loss, tax implications Date: 12/24/2008 5:08 PM
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There is the trade date, which is when the order is executed, and the settlement date 3 days later. For tax purposes the trade date rules.

OK, time for an IRS/Congress "thinking" question. As a practical matter, it wouldn't make any difference if one used the trade date or the settlement date, so long as one used the same date for the taxman.

Is the IRS' mandate of the trade date just a choice to ensure that one uses the same date? Of course the trade date also has the minor advantage of making it "easier" to get a transaction into the current year, vice having it spill over into the next year.

As to the main point of the thread, it's useful to point out that the trade date isn't the same as the date the order was placed--especially on good 'til canceled orders.

Eric Hines

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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: 103155 of 120800
Subject: Re: Selling stock at huge loss, tax implications Date: 12/24/2008 7:32 PM
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OK, time for an IRS/Congress "thinking" question. As a practical matter, it wouldn't make any difference if one used the trade date or the settlement date, so long as one used the same date for the taxman.

Well, the trade date is the date the transaction actually happens. That is the date on which the buyer buys and the seller sells. Paying for the transaction is a separate matter.

And not all transactions settle on the same date. Stocks generally settle 3 days after the trade date. Bonds are from 1 to 3 days after the trade. Mutual funds settle on the trade date. And private transactions can settle whenever the parties choose to settle.

--Peter

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Author: WPatch Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 103156 of 120800
Subject: Re: Selling stock at huge loss, tax implications Date: 12/24/2008 11:35 PM
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At Schwab and Fidelity mutual funds settle the next day, except I think money funds at Fidelity are same day. Many mutual funds at Scottrade settle next day; some 3rd day. So I believe the genralization that mutual funds settle the same day is often erroneous.

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Author: Errigal Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 103172 of 120800
Subject: Re: Selling stock at huge loss, tax implications Date: 12/26/2008 1:26 PM
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I've decided I'll sell some of my SIRI shares. My initial purchase of XMSR was 500 shares on 12/14/05 at $29.3 for a total cost of $14.660.99. Following the merger of SIRI and XMSR, those 500 shares were exchanged for 2300 shares of SIRI on 7/30/08. If I sold exactly 2300 shares of SIRI in the next couple of days, can I claim my loss against the original purchase price of the XMSR shares or do I have to average the purchase cost based on all the XMSR and SIRI shares bought over five different transaction dates at varying costs?

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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: 103173 of 120800
Subject: Re: Selling stock at huge loss, tax implications Date: 12/26/2008 2:19 PM
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If I sold exactly 2300 shares of SIRI in the next couple of days, can I claim my loss against the original purchase price of the XMSR shares or do I have to average the purchase cost based on all the XMSR and SIRI shares bought over five different transaction dates at varying costs?

You would use the cost of the oldest shares first. If that was the XMSR shares (which were eventually converted into SIRI), you are correct. But if you had some other purchases of SIRI before that XMSR purchase, you'd use those shares first. This is the FIFO (First In, First Out) method. It is the default choice for common stocks.

You can elect to use the specific identification method to tell which shares you sold. For that, you need to instruct your broker which shares to sell, and they need to confirm that instruction in writing. So if you want to sell those shares from the XMSR merger AND they are not your oldest shares, you will have to tell your broker to sell that lot of shares.

You cannot use any kind of average cost with common stocks.

--Peter

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 103175 of 120800
Subject: Re: Selling stock at huge loss, tax implications Date: 12/26/2008 2:28 PM
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I've decided I'll sell some of my SIRI shares. My initial purchase of XMSR was 500 shares on 12/14/05 at $29.3 for a total cost of $14.660.99. Following the merger of SIRI and XMSR, those 500 shares were exchanged for 2300 shares of SIRI on 7/30/08. If I sold exactly 2300 shares of SIRI in the next couple of days, can I claim my loss against the original purchase price of the XMSR shares or do I have to average the purchase cost based on all the XMSR and SIRI shares bought over five different transaction dates at varying costs?

Although not explicitly stated in your post, I'm going to assume you purchased XMSR and at least some SIRI before the merger. If your XMSR shares and (original) SIRI shares are held in different brokerage accounts, then you can sell 2300 shares from the XMSR account and use that cost basis.

If the shares are held in a single account, then you must use either the first-in, first-out or specific share methods to calculate your cost basis using all of the XMSR and SIRI purchases. If the 500 XMSR wasn't the first purchase, then you must notify the broker in advance which shares you are selling and receive confirmation from the broker than he received your instructions.

The one thing you CANNOT do is average your cost over various purchases of shares. Average cost basis is only available for mutual fund holdings.

Ira

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Author: Errigal Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 103177 of 120800
Subject: Re: Selling stock at huge loss, tax implications Date: 12/26/2008 2:59 PM
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You would use the cost of the oldest shares first. If that was the XMSR shares (which were eventually converted into SIRI), you are correct. But if you had some other purchases of SIRI before that XMSR purchase, you'd use those shares first. This is the FIFO (First In, First Out) method. It is the default choice for common stocks.

Oh, I didn't know anything about this FIFO method. I bought shares in five separate transactions. And my initial purchase was SIRI.
12/12/2005 -- SIRI shares
12/13/2005 -- SIRI shares
12/14/2005 -- XMSR shares
12/20/2005 -- XMSR shares
7/31/2008 -- SIRI shares

So to keep it simple, I should sell off the SIRI shares first? If I wanted to sell off the SIRI shares bought on 12/12/05 and those bought on 12/13/2005 would I need to do so in two separate transactions, or would it be better to do so?

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Author: Errigal Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 103178 of 120800
Subject: Re: Selling stock at huge loss, tax implications Date: 12/26/2008 3:07 PM
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Thanks Ira:

Although not explicitly stated in your post, I'm going to assume you purchased XMSR and at least some SIRI before the merger.

Yes


If your XMSR shares and (original) SIRI shares are held in different brokerage accounts, then you can sell 2300 shares from the XMSR account and use that cost basis. If the shares are held in a single account, then you must use either the first-in, first-out or specific share methods to calculate your cost basis using all of the XMSR and SIRI purchases.

The shares are all in the same brokerage account.


If the 500 XMSR wasn't the first purchase, then you must notify the broker in advance which shares you are selling and receive confirmation from the broker than he received your instructions.

XMSR wasn't the first purchase. I'm guessing there isn't enough time for a written confirmation by end of month, so will go with the FIFO method you describe and sell SIRI shares first.

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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: 103179 of 120800
Subject: Re: Selling stock at huge loss, tax implications Date: 12/26/2008 3:44 PM
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12/12/2005 -- SIRI shares
12/13/2005 -- SIRI shares
12/14/2005 -- XMSR shares
12/20/2005 -- XMSR shares
7/31/2008 -- SIRI shares

So to keep it simple, I should sell off the SIRI shares first?


It's not "should I". You are considered to be selling the shares purchased on 12/12 first. Once those are gone, you are selling the 12/13 shares, then the 12/14 shares.

The only way around this is to use specific ID as previously mentioned.

And there is plenty of time for specific ID. Most brokers will do the necessary confirmation of shares sold with the trade confirmation. The only extra step necessary would be to make sure you're telling the broker what shares to sell. They are all different in how they handle this issue. And I've been told there are a couple that refuse to cooperate. It may take a call to your broker rather than using their on-line trading system.

--Peter

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 103180 of 120800
Subject: Re: Selling stock at huge loss, tax implications Date: 12/26/2008 4:47 PM
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And there is plenty of time for specific ID. Most brokers will do the necessary confirmation of shares sold with the trade confirmation. The only extra step necessary would be to make sure you're telling the broker what shares to sell. They are all different in how they handle this issue. And I've been told there are a couple that refuse to cooperate. It may take a call to your broker rather than using their on-line trading system.

Just to make things crystal clear, you do not have to receive confirmation before the end of the month. You only need to receive it. While most brokers will make the indication directly on the trade confirmation, some will issue a corrected confirmation after the fact or provide some other form of written acknowledgment.

Ira

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Author: Hohum77 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 103181 of 120800
Subject: Re: Selling stock at huge loss, tax implications Date: 12/26/2008 5:53 PM
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If I wanted to sell off the SIRI shares bought on 12/12/05 and those bought on 12/13/2005 would I need to do so in two separate transactions, or would it be better to do so?

You can save yourself a transaction charge and sell the total shares acquired on 12/12/05 and 12/13/05 at one time.

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