, and whatever else Mother Nature may throw at you this week,
trying to save money on your tax return for this year is probably
just about the last thing on your mind. But even though you still
have four months to go before the end of 2011, now's actually the
perfect time to plan for how you can make the most of losing
investments that you've suffered so far this year.
In fact, if you
get your tax act together now
, you might well beat the rush of last-minute procrastinators
trying to get in under the December deadline. That can mean not
only tax savings but more money in your pocket.
A big reversal
Until last month, many investors weren't thinking about tax losses
at all. With the broad market indexes pushing their highest levels
since before the 2008 market meltdown, plenty of investors were
riding high with significant gains on their stocks.
But that all changed with the recent market correction. The
decline has been brutal in its scope:
- The telecom industry has started to polarize, turning into a
battle of haves versus have-nots.
) , which many see as being on the
outside of the in-group
in telecom, have both lost more than 35% of their share value in
just the past month.
- After a fairly good couple of years for the technology
sector, several tech stocks have reversed course dramatically.
) now seems rudderless as it
moves away from its PC business
, while networking stocks
(Nasdaq: AKAM) and
) have had to deal with a combination of increased competition
and missed expectations. All three have lost about a third of
- More generally, stocks that can't meet investor demands are
getting taken to the woodshed quickly and decisively.
(Nasdaq: ETFC) is down 33% in the past month after falling short
on trading activity levels in its most recent quarter.
) was the biggest loser in the S&P 500 over the past month,
dropping 44% on lousy unemployment news and concerns that more
specialized competitors have the inside track to growth.
In other words, if you've done any investing this year, you
probably have some losers on your hands. Fortunately, there's a way
to get at least
of those losses back.
The key to salvaging losing stocks comes from tax rules for capital
losses. By selling losing stocks, you can apply those losses
against any capital gains you have on winning stock sales.
Moreover, if you have more losses than gains, you can take up to
$3,000 each year to offset other types of income. You can usually
carry forward any extra losses into future years.
So why worry about this now? The first reason is that if you
wait until November or December, thousands of other losing
shareholders may already have sold out, potentially pushing share
prices down even further and leaving you with an even bigger loss.
By being first out, you can beat the crowd and get a relatively
high price for your shares.
The second reason, though, applies if you think your losing
stocks will rebound. In that case, selling outright may not seem
like a smart move. Because of complicated rules covering what's
known as wash sales, you can't simply sell the stock and buy it
right back. But you
buy more shares now -- essentially doubling down on your investment
-- and then sell the original higher-cost shares after 30 days have
Alternatively, you can use exchange-traded funds to avoid the
wash sale rule. For instance, if you have a lot of losing tech
stocks like HP, Akamai, and Juniper, then you could sell the
individual stocks, and buy a technology sector ETF that holds those
stocks, along with other industry peers. It won't be a perfect
match, but odds are good that if those companies recover, the
entire ETF will as well.
It's hard to watch your stocks lose value. But letting Uncle Sam
shoulder some of the burden with you makes it at least a little bit
better. By taking advantage of tax-loss selling sooner than later,
you can make the best of a bad situation.
You can't avoid losses on all your stocks, but you can improve
your odds. Read the Fool's free special report, "5 Stocks the Fool
Owns -- And You Should Too," and build a better portfolio
Tune in every Monday and Wednesday for Dan's columns on
retirement, investing, and personal finance. You can follow him
on Twitter here.
doesn't let the tax tail wag the investing dog, but it gets
close sometimes. He doesn't own shares of the companies mentioned
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