I Might Sell Two Stocks For The Tax Loss

I have two stocks that have losses and I’m thinking about selling them before the end of the year so that I can use the loss to pay less in tax.

Right now as of 11/16/2017, the combined loss for CVS and GILD equals about $9,000. I can use that loss to offset gains I have in a second account I own with another broker that has more than $20,000 in realized gains. 

The Tax Rules For Gains And Losses

When you sell stocks that have a gain, you will owe tax on that gain. However, if you have losses to offset that gain, you can use those losses to offset that gain and pay less in tax. For instance:

You sell 1 stock for a gain of $10,000
You sell 1 stock for a loss of $6,000
Result = you owe tax on the difference of $4,000

You can always use a loss to offset a gain which makes total sense and would be very unfair if you couldn’t. But what happens when your losses are greater than your gains? There are two examples you must understand. The first one:

You sell 1 stock for a gain of $10,000
You sell 1 stock for a loss of $6,000
You sell 1 stock for a loss of $5,000
Result = you have a net loss of $1,000 and you can deduct all of the $1,000 from your tax bill

As long as you have net losses that are $3,000 or less, you can deduct all of those losses from your taxes. But unfortunately, the rules limit your losses to just $3,000 so if you have more than that, you will have to carry that loss over till next year (and maybe the year after that and after that and so on). For instance:

You sell 1 stock for a gain of $10,000
You sell 1 stock for a loss of $6,000
You sell 1 stock for a loss of $15,000
Result = you have a net loss of $11,000 but you can only deduct $3,000 from your tax bill this year

The remaining loss of $8,000 must be carried over to the next tax year where you will hopefully have gains to offset that $8,000. But, if in the next year you don’t have those gains, you can once again deduct $3,000 from your taxes and then carry over the remaining $5,000 to the following year again. 

Should I Sell My Shares Of CVS And GILD For The Loss?

I’m very unexcited about both of those stocks. They have been awful and I wish I never bought them (obviously!). The way I see it I have three options: 

  1. I can continue holding them and hope they start going back up
  2. I can sell them and use the losses to offset my overall gain I have in other stocks so that I pay less in tax
  3. I can sell them and use the losses (#2) and then buy them back a month from now 

The US government doesn’t want you to be able to sell your all your stocks that have losses so that you can lower your tax and then go buy them back right away again. That is why there is a rule that if you buy back any stock you sold for a loss within 30 days of selling it, you CANNOT use the loss on your taxes. This is called a wash sale.

So, if I decide I want to keep holding those stocks because I think their performance will improve in the future, the only way I can use those losses is if I sell the stocks and then wait at least 30 days to buy them back again. The risk is that in those 30 days the price of those stocks will go up which would mean I have to pay more to buy them back than I got when I sold them. 

If I knew that the price of CVS and GILD would stay the same or go lower in the next 30 days, selling for the tax loss and then buying them back in 30+ days would be a no-brainer. But of course I don’t know that. So, I have to make a decision between the three options listed above and right now I am leaning toward #3. 

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