Capital Gains Taxes
The government encourages all sorts of economically-inefficient behavior. But, until we can change the laws, we must play by the rules we are dealt. One such bit of goofiness is the capital gains tax. When stocks are sold at a profit, the gain is taxed. That gain is taxed at a higher rate if the stock was owned for less than a year (short-term capital gains) than if the stock was owned for more than a year (long-term capital gains). If you sell stocks at which you are at a loss, you can use the losses to offset your capital gains and reduce your tax liability. Here are the rules of the game:
- A capital gain or loss is equal to (SharePrice_1*Quantity-commission-SharePrice_0*Quantity-commission)
- Short-term capital gains tax applies to stocks you held less than one year, and is equal to your marginal tax rate. Long-term capital gains tax is 15%.
- Your overall capital gains tax liability for your short-term and long-term capital gains can be determined by summing your gains and losses in each category.
- If your capital losses exceed your capital gains, you may deduct up to $3,000 of losses each year from ordinary income. If losses still remain, you may carry them over to be deducted the following year.
- You cannot claim a loss from a sale if you repurchase the same stock within 30 days of the sale in question.
In conclusion, to reduce your capital gains liability make sure to offset your gains by selling losers before December 31st.
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It's important to be careful locking in losses, though: if you think it's likely that CG tax rates are going to increase, you're better off saving losses for future years.