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Old 12-11-2007, 02:43 PM
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Tax Strategy for Stock Losses Incurred in 2007

For taxpayers who have incurred substantial unrealised losses in 2007
It would be prudent to take realise these losses immediately especially if the taxpayer has had substantial capital gains from earlier stock transactions in tax year 2007.

IRS allows capital losses to be offset against capital gains incurred in the same tax year. Hence, one strategy would be immediately sell positions that are either long positions or short positions that have substantial unrealised losses and offset these against any gains realised in 2007.

What if the Taxpayer has no Capital Gains to offset these losses?
The more difficult situation is to give an opinion where there are no capital gains to offset against " unrealised loss" positions. Here, the problem is when you sell these positions you will incurr substantial losses and will not be able to deduct more than $3,000 losses, (the maximum amount deductible in 2007) per year from your Taxable income.

The remaining non-deductible losses would then have be carrried over to future years to be either offset against future capital gains or simply be able to deduct $3,000 per year.

If the taxpayer can repurchase these securities after 30 days, then per IRS rules these losses would be deductible, whereas where the Taxpayer to repurchase the original securuity within 30 days, the transaction would be deemed a "WASH SALE" and no losses would be deductible. The IRS would then allow taxpayer to simply increase his adjusted basis to the extent of the non-allowable loss substained on the sale transaction.

It might be worth noting, that if the securitiy is expected to recover substantially within 30 days, then clearly, it might not may sense from an investment strategy in realising the loss to offset against capital gains or to deduct the maximum of $3,000 of capital losses per year!

Clearly, it is worth consulting with your Tax advisor what might be the best strategy for your individual tax situation.

Please also check out this topic related to capital losses.
Offset Capital Losses with Rental Income

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Last edited by TaxGuru : 12-11-2007 at 03:02 PM.


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