Selling Stocks At A Loss To Offset Taxable Income

Posted on: 29 December 2016

Most investors strive to cultivate investments that will result in a gain when sold. However, an investment loss is not necessarily a total and complete loss. Individuals can strategically sell stocks at a loss to offset certain gains otherwise included in taxable income.

Effect of a stock sale loss 

You may have some stock holdings that have declined in value over time. If the stocks are sold by the end of the tax year, you may utilize the loss to offset gains realized on other investment transactions. If your investment losses happen to exceed investment gains for the year, you can use up to $3,000 of that excess to offset other sources of income, including wages.

Tax bracket differences

A gain or loss on the sale of stocks is taxed differently than the profit or loss from a business operation. Earned income is usually taxed at so-called ordinary income tax rates. The sale of an investment asset, however, may be eligible for a reduced capital gain tax rate. Before selling any underperforming stocks solely to offset gains, first determine if your applicable tax bracket makes the strategy worthwhile.

Your capital gain rate is dependent on your regular tax bracket. Tax filers in the lowest two regular tax brackets may pay a zero percent rate on capital gains. If you are eligible for the zero percent capital gain rate, there is no need to offset the gain. If your income level results in the taxation of capital gains, however, the strategy of harvesting losses may be effective.

Schedule D reporting

Capital gains and losses are reported on IRS Schedule D. The net gain or loss is then entered on Form 1040. Schedule D is designed to limit any excess of losses over gains to $3,000 per year. A net capital loss of over $3.000 can be carried forward and deducted on your future tax returns. Whenever there is a capital loss carryover, a similar strategy of minimizing taxable gains can be used in a subsequent year.

If you have a net capital loss carrying over from a prior year, you might consider selling securities at a gain to absorb the available loss. The carryover loss from an earlier year is entered on the current Schedule D along with the gains or losses for the current year.

If you expect that a weak stock is unlikely to rise in price, deliberately selling it for the sake of offsetting gains provides a measurable benefit. Contact a certified financial planner for more advice on income tax strategies.