Time To Sell Off Losing Stocks? Dumping Losers Has Benefits

I wanted to take this final Tuesday of 2008 to talk about another terrible, time-sensitive ”t”…taxes!

As the tax year comes to a close fund managers sift through their portfolios and decide what to throw away and what to keep. Individual investors ought to do the same thing. Converting a few paper losses into realized losses can give you a tax credit! 

Realized losses can be used to offset capital gains or reduce your taxable income base, but this does not mean that you should sell everything.

Here are a couple of things you should know before you sell:

1. There is an annual limit to the tax credit - The maximum write off per year is $3,000. If you lost more than $3,000 you can apply the additional losses to future tax years. This is referred to as carrying forward.

2. Beware of the wash sale rules – If you buy and sell the same stock (or even a similar stock) in a short period of time, your loss may not qualify for the tax credit. Visit Investopedia for details on wash sales. 

The tax implications make the last week of December a popular time for selling off losing positions. Early January is a popular time to re-enter the market (particularly the market for small-cap stocks) and markets typically post gains. The past year has been one of heavy losses, perhaps the amazing January effect will strike again.

In the meantime, remember: dumping losers at the end of the year has it is benefits! ;)

BTW, Techie Tuesdays will retrurn on the first Tuesday of the year!