With stocks down sharply in 2008, you should realize capital losses by selling securities held in taxable accounts by year-end. Those losses can offset realized gains, if you have any in 2008. Up to $3,000 worth of net realized losses can be deducted against ordinary income.
Net losses over $3,000 can be used in future years, with no time limit. That is, they can offset any future capital gains, until they’re used up. Each year, net losses that you haven’t used will provide you with another $3,000 tax deduction.
After you harvest capital losses in this manner, you must be aware of the wash-sale rules. If you buy back the same security that you sold, or a security that’s substantially identical, within 30 days, your tax loss won’t count. Thus, you can park the sales proceeds in a money market fund for 31 days before reinvesting. Alternatively, you can immediately buy a security that is not substantially identical to the one you’ve just sold at a loss.