Sell Your Losing Investments for a Tax Deduction

As the year moves closer to an end, it is time to start figuring out what you can do to reduce your tax liability “ if you are concerned about that sort of thing. If you have some stock losses from this year, now is a great time to consider selling them in order to take a tax deduction.

Get Tax Deduction for Your Losses

Even though the stock market is up on the year, you might be some investments that just aren’t panning out. If you have losses, up to $3,000 can be used as a deduction if you are married filing jointly (singles can only deduct up to $1,500). So, if you have three different stocks that you want to sell for a total loss of $5,000, you can deduct $3,000 of those losses. You will need to include a properly filled out Schedule D with your Form 1040.

Your left over $2,000 in losses won’t go to waste, though: It is possible to carry over your losses to another year. However, you still can’t take a deduction of more than $3,000 on investment losses in a tax year, so carrying forward too many losses starts to become counter-productive.

You should also remember that it is possible to use your losses to offset any capital gains. If you sell some stocks for gains, you can use your losses to offset. This means that if you sold some stocks for a total gain of $4,000, you can use your losses to offset. In our example above, your $5,000 in losses will offset your gains, leaving $1,000 left over in losses for a tax deduction.

Avoid the wash sale rule: Remember, though, that if you want to sell for a loss and take a tax deduction, you need to be careful. If you buy a substantially identical stock within 30 days of selling your losing stock, you will not be able to take the deduction. Speaking with a knowledgeable tax professional can help you avoid pitfalls associated with deducting investment losses.

Should You Ever Sell a Losing Investment?

Before you sell some of your losing stocks, it is important to carefully consider whether or not you should sell. The last couple of years have been rather volatile, and some good companies have shared in market-wide losses. Before you sell an investment, you need to make sure that it really is time to sell. Some questions to consider before you sell an investment for a loss include:

  • Why do you want to sell?: Fear is rarely a good reason to sell. Carefully consider your motives, and try to figure out why you want to sell. You should be able to go through the pros and cons of selling the investment without giving in to panic.
  • Have the fundamentals changed?: Look at the fundamentals of the company. If the fundamentals haven’t changed “ if it’s still a solid company with reasonable growth prospects or staying power “ you might want to consider riding out the current downturn.
  • Does the investment still fulfill its purpose?: Remember why you bought the stock in the first place. If the stock is still fulfilling its purpose, and if your goals haven’t changed, you might not need to sell.

Answer the above questions. If you are concerned about the company’s future, or if your portfolio would be better balanced without the stock, it might be wise to sell and tax the tax deduction.