I do not give tax advice. Please seek the assistance of your tax advisor before making any decisions involving your tax situation.
Not My Objective
When someone decides to invest money, they could have a variety of different objectives. These could range from preserving capital at all costs (very conservative strategy) to actively trying to grow the money as quickly as possible (aggressive strategy). However, I can say with authority that there is one thing that NOBODY wants to do…………lose money.
Unfortunately, I have had plenty of opportunities to lose money for people over the past 10 years and although I hate to admit it, I have “seized” several of these opportunities. When this occurs, there is really very little that can be done other than to “take my medicine.” Some advisors will attempt to hide from clients once they have lost money for them, but in my opinion, this only compounds the problem.
There is, however, one thing that absolutely can and should be done when faced with this situation in a non-retirement account: REALIZE the loss.
Please allow me to illustrate below:
The Tales of “Investment A”
Investment A is purchased in a brokerage account on 1/23/2005 for $25,000, and is currently valued at $5,000. Since we are still holding the investment, this loss is a “paper loss” or is “unrealized.” If we do nothing, which is really NOT a strategy, this loss will continue to plague your statements and your psyche. However, if an astute advisor recommends that you sell the investment, the loss then becomes a “realized” loss and you will enjoy a tax benefit. Capital gains and losses are calculated on schedule D of your tax return. The year in which the investment is sold, you can net the loss against your gains (short-term and long-term must be calculated separately) and if there are excess losses, you may deduct up to $3,000 (married filing jointly) on your return. In this case, that would leave an additional $17,000 of losses that can be carried forward indefinitely.
Depending on your tax bracket, this write off can have a large impact on your tax situation.
This is a hypothetical example and is not representative of any specific situation.
“Take one down, Pass it around…..”
Unrealized losses cannot be passed on to a beneficiary. This means that in the example above, if we had not sold the investment and the owner died, the beneficiaries would NOT be able to enjoy this tax benefit. It simply disappears.
You knew there had to be one, right? After all, I am an investment advisor and as an industry, we are universally distrusted. This reputation is well deserved I am afraid.
Relax…the catch is NOT a big one. The “wash sale rule” states that if you realize a loss and would like to take the deduction on your tax return, then the investment cannot be re-purchased for at least 31 days. I am sure most of you just cannot wait to buy that same loser investment again, right!
“But WHY didn’t my advisor….”
Many people cannot understand why this concept has not been explained to them by their advisor. There could be a variety of reasons, but none of them are legitimate. It could be that the advisor does not want to remind you about his/her losing investment, so they are hesitant to mention it. Or possibly, the advisor likes to say “I don’t give tax advice” to every single issue even remotely related to taxation. Or, maybe your advisor just doesn’t want to deal with it. Like I said before, our reputation is well deserved.