How to Sell Stock for a Tax Loss
The main reason individual investors want to sell a stock for a tax loss (also called tax loss harvesting) is to reduce their overall tax liability. When you sell stocks in your portfolio for a tax loss, in theory they counteract your capital gains taxes and your overall tax liability decreases. This translates into owing fewer taxes to the IRS. Of course, this seems very simple in theory but unfortunately, when it comes to taxes and investments, nothing is that easy.
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Things You'll Need
- Long term stock information
- Long term gains
- Long term losses
- Short term stock information
- Short term gains
- Short term losses
Instructions
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1
Gather your long-term stock information. You need to know the gains on losses on stocks you've owned for more than one year in order to sell stocks for a tax loss. Get your long-term stock information together, including the price you paid, fees and the date you bought the stock.
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2
Calculate long-term losses. You need to know the exact amount of your long-term losses in order to reduce your overall tax liability by selling stocks for a tax loss. Take the original purchase price of the stock and add any broker's fees, commissions and dividends paid to you. Then, subtract that amount from the current prices of your long-term stocks. This negative number represents a loss on your long-term stock.
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3
Figure out long-term gains. Along with long-term losses, you have to know your long-term gains. Take the original purchase price of the stock and add any broker's fees, commissions and dividends paid to you. Then, subtract that amount from the current price of your long-term stocks. This positive number represents a gain on your long-term stock.
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4
Gather your short-term stock information. You also need to know the gains and losses on stocks you've owned for less than one year in order to sell stocks for a tax loss. Get your short-term stock information together including the price you paid, fees and the date you bought the stock.
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5
Calculate short-term losses. You do this the same way you did for long-term losses in Step 2. Take the original purchase price of the stock plus broker's fees, commissions and dividends paid. Subtract that amount from the current stock price. This negative number represents a loss for your short-term stocks.
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6
Figure out short-term gains. You do this the same way you did for long-term gains in Step 3. Take the original purchase price of the stock and add any broker's fees, commissions and dividends paid to you. Then, subtract that amount from the current price of your short-term stocks. This positive number represents a gain on your short-term stocks.
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7
Estimate your taxable investment income. Calculating your taxable investment income allows you to estimate your tax liability before you sell stocks for a tax loss. First, subtract your long-term losses from your long-term gains. This is your net long-term gain/loss. Then, subtract your short-term losses from your short-term gains. This is your net short-term gain/loss. Finally, subtract the long-term losses/gains from the short-term losses/gains. This is your taxable investment income.
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8
Sell the stocks with the largest drop in value. Once you know your taxable investment income, you know the dollar amount of stocks to sell for a tax loss. You want to sell the ones that have had the most significant drop in share price from the time of purchase to the date of the sale.
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Tips & Warnings
Always remember to recalculate taxable investment income. After selling the stock for a tax loss you have to recalculate your taxable investment income (Step 8) to include the new loss. At this time, your new taxable investment income should be lower than the original figure.
Always check the new tax laws. Tax laws change constantly, be sure to check the laws for the current year to make certain you aren't violating any tax codes.
References
- Photo Credit TAX TIME image by brelsbil from Fotolia.com
