A Losing Investment Isn't Always a Bad Thing
Friday May 16, 2008
Our financial goals typically revolve around building wealth, and a great deal of this is done through investing. We obviously look to find investments that will increase in value, but it is inevitable that some of our investments will end up being duds. We will curse these investments and blame them for ruining our perfect portfolio, but a bad investment can be a blessing in disguise. The blessing comes directly from our friends at the IRS.
That’s right, the IRS allows you to use investment losses in taxable accounts as a deduction. If you currently only invest in retirement accounts, none of this will pertain to you, but please keep reading as you will eventually have taxable investments at some point. Unfortunately the wonderful folks at the IRS are only marginally helpful. They do limit the amount of losses you can deduct, but of course they have no limits on how much you gain.
You are currently allowed to deduct up to $3,000 in investment losses each year. Amounts in excess of $3,000 can be carried over into future years which can have a significant impact. Another benefit is that you do not necessarily need to have capital gains in order to use the losses to offset them. If you have a net loss it can be used to offset your regular income.
The other benefit is the ability to bank your losses. Unlike many tax deductions, losses don’t have a use it or lose it requirement. If you have losses that exceed $3,000, the additional loss can be carried over to be used in future years! As an example, say this year your taxable brokerage account saw $20,000 in losses and $10,000 in realized gains. This means you have a net loss of $10,000 available to claim, but you can’t use it all this year. You have $3,000 available to you for the current tax year, which can reduce your income and $7,000 to carry forward. Next year the market is great, and after selling some investments you have realized a net gain of $5,000. You can take $3,000 of that $7,000 to apply towards your gains leaving you with a net gain of only $2,000 and you still have $4,000 left in the “bank." You just cut your taxable investment gains in half by banking some of the losses you took last year. What a wonderful thing.
Of course, you need to check with your accountant or tax planner. Investment taxes can be complicated, and there are some tricky rules you need to abide by, so this is one of those situations where it can pay to have professional help.
That’s right, the IRS allows you to use investment losses in taxable accounts as a deduction. If you currently only invest in retirement accounts, none of this will pertain to you, but please keep reading as you will eventually have taxable investments at some point. Unfortunately the wonderful folks at the IRS are only marginally helpful. They do limit the amount of losses you can deduct, but of course they have no limits on how much you gain.
You are currently allowed to deduct up to $3,000 in investment losses each year. Amounts in excess of $3,000 can be carried over into future years which can have a significant impact. Another benefit is that you do not necessarily need to have capital gains in order to use the losses to offset them. If you have a net loss it can be used to offset your regular income.
The other benefit is the ability to bank your losses. Unlike many tax deductions, losses don’t have a use it or lose it requirement. If you have losses that exceed $3,000, the additional loss can be carried over to be used in future years! As an example, say this year your taxable brokerage account saw $20,000 in losses and $10,000 in realized gains. This means you have a net loss of $10,000 available to claim, but you can’t use it all this year. You have $3,000 available to you for the current tax year, which can reduce your income and $7,000 to carry forward. Next year the market is great, and after selling some investments you have realized a net gain of $5,000. You can take $3,000 of that $7,000 to apply towards your gains leaving you with a net gain of only $2,000 and you still have $4,000 left in the “bank." You just cut your taxable investment gains in half by banking some of the losses you took last year. What a wonderful thing.
Of course, you need to check with your accountant or tax planner. Investment taxes can be complicated, and there are some tricky rules you need to abide by, so this is one of those situations where it can pay to have professional help.
Comments
No comments yet. Leave a Comment