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I have been throwing around the following strategy for a bit and have been unable to convince myself that it is unsound. I am hoping someone with more extensive knowledge could lend a verdict here.

I have owned a stock for less than one year which has experienced a substantial drop (who'd guessed?). It seems there is no reason for me not to sell it now and get the short term capital loss. Then in a separate decision, decide to immediately buy it back or some other stock I believe to be a better purchase. I am a buy-n-hold guy but tax diff here seems to make sense. Following is a theoretical mathematical comparison.

(1) Bought 100 shares at \$100. Now at \$50. 5 years from now sell at \$300. Pay 20% on \$20,000 = \$4,000.

(2) Bought 100 shares at \$100. Sell now at \$50. Buy back 100 shares immediately at \$50. Sell in 5 years at \$300. Tax benefit 28% (my tax bracket) on \$5000 loss = \$1400. 5 years later pay 20% on \$25,000 = \$5000. Total net taxes = \$3600. Of course must add extra fees for buy and sell (\$16).

Case 2 is less taxes than Case 1. The difference being equal to (.28-.2)*(5000) or (short term tax - long term tax)*(short term loss). As long as this is greater than fees to buy and sell ie loss > \$16/(.28-.2) then I should do so.

Even in the case that it doesn't ever go back up before I eventually sell, I am basically looking at reaping the tax benefit of a short term loss versus the entire loss at long term tax rate. If this is correct, one would always want to sell losses beyond the aforementioned hurdle before 1 year is up.

Is this right?

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