Can I Defer Stock Losses on Income Tax?
With the year approaching an end, investors give careful thought to what consequences any sales or purchases of securities may have on their tax bill for both the current and following year. Capital losses -- and gains -- from stock transactions (or any other investment) allow investors to manage the potential tax ramifications. The key question, however, comes down to what potential tax rate changes may do to the bottom line and whether deferring transactions presents an advantage.
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Capital Gains
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Capital gains -- profits from selling an asset for more than was paid -- are treated with two tax rates: one for short-term gains held less than one year and another for gains held longer than one year (long-term gains). The tax treatment for long-term gains is 15 percent, while the long term rate is a rate equivalent to the taxpayer's ordinary income rate. Short-term rates are more favorable to the taxpayer.
Capital Losses
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Unlike gains, there is no tax on a loss, but the usage of any realized losses to offset capital gains is a benefit that requires thoughtful consideration. Capital losses are accounted for in the year in which they are transacted (the same as with gains). You cannot take the loss and defer it to a following year. As with capital gains, losses are categorized into either short-term losses or long-term ones. However, how each is used against gains can make a difference in the final tax liability. Of course, most investors don't wish to lose money, but holding on to a losing investment -- while not a good practice -- could possibly have a greater benefit later depending on tax treatment.
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Tax Planning
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Applying losses correctly can present advantages that can minimize the tax liabilities of capital gains. Additionally, to the extent losses exceed gains, the IRS also allows that a maximum $3,000 not used to offset gains can be used to reduce adjusted gross income. Much of the deliberation when considering how to best use losses depends on the tax rates at which they will be treated. When potential changes in tax rates loom ahead, deciding to sell now or later becomes much more meaningful.
Potential Policy Impact on Capital Gains/Losses
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According to Bob Rywick, senior tax analyst at the Tax & Accounting business of Thomson Reuters, "individuals should try to have long-term capital losses offset short-term capital gains and/or ordinary income before they are taken into account to offset long-term capital gains," and he adds that "This requires taking the long-term capital losses in a year in which they would exceed long-term capital gains." Other considerations need to be made depending on the outcome of potential tax changes.
As always, consult with a tax professional.
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