Q:

Kerry:

 

Did not help my "new" stock broker's news that we now have $38,000.+/- in losses in Tech Stocks.  From a Tax strategy, do we now _need_ to dump this and take the losses over the next three years?  Or, offset this with $38,0000.+/- sales of our Bank stock (mostly old Bank of America (BAC)).  Bank of America pays 4% dividend on a $44. per share.  Our BAC cost basis is $24. per share.  I calculate a bit more return than 4% dividend.  To keep or not to keep BAC?

Our new broker recommends we move to more cash thru this offset. Go into Mutual funds.

Kerry, what say you?

A:

Just as with whether or not it's a good time to sell off real estate, the tax consequences of selling off stocks are completely irrelevant in deciding whether to dump them or not.  That decision should only be based on whether you believe that their value has peaked and is likely to go down, and whether you could put the proceeds into a more lucrative investment.

Assuming that you do come to the conclusion that those tech stocks have no upside potential and are heading downward, selling would be the best move from an investment perspective.  From the tax angle, that will give you $38,000 of capital losses that can be used to offset up to that much of capital gains. 

Again, you shouldn't sell off appreciated assets just to recognize the gains, unless those assets meet the same criteria of heading downward.

If you don't have enough capital gains this year to offset the full $38,000 of losses, you can claim $3,000 of losses above the gains, and carry the unused losses over to your next year's tax return, and so on.

While it wouldn't make any sense to do this in your case, there are some people who try to intentionally recognize capital losses by selling off deflated stocks and then repurchasing them.  IRS has a weapon against this kind of manipulation called the Wash Sale Rule.  Under this rule, if the same stocks are repurchased within 30 days after their sale, no capital loss from the sale may be claimed on your tax return.  The loss would have to be added to the cost basis of the replacement stock.     Again, this shouldn't apply to your case because, if the stocks are already so terrible that selling is the wisest move, there would be no reason to repurchase them.    

I hope this covers the points you were after.

Kerry

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 5/01/2005 07:28:00 PM Send this post: