Just because the stock market lost money doesn’t mean you have a deductible loss. As long as you hold on to an investment, you only have a loss on paper. It’s only when you actually sell the investment that you have a transaction to report on your tax return.
Fortunately, the tax law allows you to offset your capital gains by your capital losses. You can avoid or minimize taxable gain by selling two investments, one at a gain and the other at a loss.
However, an investment sold at a loss is not gone forever. If you believe it was a good long-term investment, you can buy it back. This strategy works very well if the price of the investment either stays the same or goes down even further. For example, let’s say you sold 100 shares of ACME stock, which you purchased for $3,000, and receive $2,500 in cash proceeds from the sale. You can use the $500 capital loss to offset capital gains or other income. Now, let’s assume you want to buy back the ACME stock because it’s a good long-term investment. If the price of 100 shares of ACME is $2,500 or less, you can use the proceeds from the first sale to buy the stock back without having to provide any additional money. Caution: You must wait at least 31 days after the sale to repurchase the stock, otherwise the loss is not allowed.
If you are an IRA owner over age 59½, you can take advantage of the down market by taking distributions (either voluntary or required) of actual investments from your IRA, instead of the cash. You’ll also escape the additional ten-percent premature distribution penalty. If there are investments within your IRA account that you want to hold long-term, but the value is currently down, you may want to consider having them distributed to you. Be aware that this is a taxable event and the fair market value of the investment must be reported on your tax return. However, any appreciation earned after the distribution will not be taxable until you sell the investment. This provides several advantages:
• If you sell the investment, it will be taxed at the lower capital gains rate, which may be less than the rate for your IRA distribution;
• It reduces your IRA account so your required minimum distributions may be smaller in future years; and
• You can gift that investment to a person or a charity at a later date.
As always, consult your investment and tax advisor prior to taking any actions.