If you don’t have loss carry-forwards, you’re starting with a clean slate this year. In that case, your goal is to wind up the year with a deductible $3,000 loss. Check your records to see if you have a net profit or loss for the year, on transactions already completed, and factor in mutual fund capital gains distributions. Then buy or sell securities to get to a $3,000 net loss.
Say you have a net gain of $2,000 for the year so far. You’d owe $400 in tax, assuming your gains qualify for the 20 percent rate on long-term holdings. Instead, you can sell enough losers to generate a $5,000 loss, bringing your net capital loss to $3,000, which you can deduct.
In a 27 percent federal tax bracket, you’d save $810 (27 percent of $3,000), instead of owing $200. You’d save more in a higher tax bracket; state and even local tax savings can add to the payoff.
Then what? If you want to keep your portfolio intact you can buy stocks that are similar but not identical to those you sold. If you’re taking a loss on a mutual fund, buy a different fund with the same objective.
Another tactic is to wait more than 30 days, then buy back the same securities. Unless there’s a huge move during that month, you’ll wind up essentially where you started, but with a valuable tax loss.
