How to Sell Stocks for Tax Breaks
Although no investor enjoys taking a loss on a stock position, with careful planning, taking a loss might actually be a smart move. Selling a stock at a loss can help reduce income tax liability, both on other stock positions and on overall income. However, many financial consultants advise against selling a stock simply for tax purposes and without regard to the investment prospects of the position.
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Instructions
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Look for losses in your stock portfolio. To reap the benefits of a capital loss, you must first have one in your portfolio.
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Review your losses. Make a list of your stocks trading at a loss and review the specifics of each trade. Some positions may still have future investment potential, while others may have gone bankrupt or simply show no immediate potential. These are your most likely candidates for a good tax-loss sale.
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Compile a list of your capital gains, which are profits you made from selling an investment such as stocks, bonds or real estate. Selling a stock to take advantage of the tax loss makes no sense unless you have taxable capital gains to offset.
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Read the instructions for Schedule D. Schedule D is the tax form where you will compute your capital gains and losses. To properly compute your tax liability, you will need to enter correct amounts in the proper section.
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Divide your gains into long term and short term. Long-term capital gains are those held for longer than one year, while short-term gains are held for one year or less. This is an important distinction, because long-term gains are taxed at the more favorable capital gains tax rate, unlike short-term gains, which are taxed at ordinary income tax rates.
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Choose your stocks and sell them. Ideally, you want to sell enough stock at a loss to offset the entire amount of any capital gains you have realized. However, any reduction in liability is an advantage.
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Offset your gains and losses on Schedule D. Enter your short-term gains in Part I and your long-term gains in Part II. Follow the form instructions to determine an ultimate gain or loss figure, which you will transfer to line 13 of your Form 1040.
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Tips & Warnings
If your losses exceed your gains, you are allowed to offset up to $3,000 in ordinary income per year with your losses. Any losses you have in excess of this amount can be carried over for use in future tax years.
References
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