What is Foolsaurus?

It's a glossary of investing terms edited and maintained by our analysts, writers and YOU, our Foolish community.

Tax Loss Selling

When the stock market trends downward, many have stocks with paper losses in their portfolios. Should those losers be sold to reduce your income tax liability? What should you sell? When should your sell?

Expanded Definition

If you have capital gains for this tax year that you will have to pay taxes on, selling some losers to reduce your tax liability is a decent strategy. You can sell at any time until 3 business days before the end of December--roughly Dec 27.

Once you sell, you must wait 30 days before you repurchase the stock under the wash sale rule. Stocks that seem to be coming back are better to hold. But those that are flat or trending downward are attractive for tax selling.

The capital gains part is only one aspect. You can write off up to $3000 each year of net losses (i.e., capital gains this year minus capital losses this year minus tax loss carryover from previous years) against regular income. Any long term losses above that are carried over to future tax years. When the stock market is down, it can be tempting to take enough losses to use up that $3K allocation. But most would not go over that amount very much unless they have a "must do now" kind of opportunity to better invest the funds.

Quality stocks with good recovery potential and/or good dividend yields are probably better to hold for recovery--other things being equal. But much depends on your particular situation, your tax rate, what is in your portfolio, etc.

The bottom line is it's a judgement call.

Related Fool Articles

Related Terms

Related Fool Discussion Boards

Post your questions on Motley Fool's "board name" board.

[to board]

Recent Mentions on Fool.com