We all hate to lose money on our investments. As long as you don't have to sell stock right now you can ride out the losses with hopes of a recovery. Those of you who did need the money this year or who decided to take your lumps, can minimize those losses by writing them off when you file your 2008 tax returns.There are actually two parts of the IRS tax code that can apply. The most obvious is the rules for writing off capital losses. Another alternative is available if you had to abandon stocks or were a victim of an investment scam. I'll take a brief look at both.
If you have an investment loss you can write off up to $3,000 (up to $1,500 if you're married filing separately), but you first must offset any capital gains with your losses. For example, suppose you sold your stocks in 2008 with a total capital gain of $500 for the year and a total capital loss of $5,000. You would write off the first $500 of the capital loss against the capital gain and have $0 capital gains this year. Then you could write off the next $3,000 against your regular income. You would then have $1,500 left over. You could then carry over that $1,500 for write offs on your 2009 taxes. For more details about how to handle your loss, read IRS Publication 550's chapter on "Sales and Trades of Investment Property."
People who owned stocks that are now worthless, such as Fannie Mae and Freddie Mac or WaMu, should consider them as sold on the last day of the year. This can affect whether or not you have a short-term or long-term loss. If your securities became worthless, you may be able to get a better write off using IRS Section 165, thanks to a new regulation effective March 12 2008. You can now treat an abandonment of stock or other securities as a loss governed by Section 165. In order to use this new regulation you must have given up all rights in the security for no consideration. This section is commonly used when you can prove you experienced a loss as a victim of an investment scam. If you believe your broker misrepresented the safety of what was sold to you, you may be able to take advantage of this section as well.
If you do have a large investment loss, I highly recommend you consult with a tax adviser before the end of the year to determine your best moves in 2008 to minimize your loss and maximize any tax advantages.
Lita Epstein has written more than 25 books including "Trading for Dummies" and "Reading Financial Reports for Dummies."
Reader Comments (Page 1 of 1)
11-08-2008 @ 4:00PM
barbara livingston said...
What can you do with 25000 of worthless Lehman
preferred stock. please advise
11-08-2008 @ 4:02PM
Lita Epstein said...
Barbara,
I highly recommend that you talk to a tax adviser who can look at your financial situation and recommend the best moves to make to minimize your losses and maximum your tax benefits.
Lita
11-10-2008 @ 7:21AM
Wayne said...
Even if you've lost money and sold these stocks or mutual funds within your ira, 401k or retirement account you would not pay taxes if it is still all within the those vehicles Correct?
11-10-2008 @ 7:25AM
Lita Epstein said...
Wayne,
You only pay taxes on investments held inside a qualified retirement plan when the money is withdrawn from the plan.
Lita
11-10-2008 @ 12:21PM
wayne said...
Your article does not make that clear enough. There is enough panic in our country and your story doesn't do much to help those that have lost so much. The reality is that many people have held onto their stocks and have seen their portfolios decline by as much as 50%. We al need to learn more and less needs to be said to cause more panic and depression and anxiety.
11-10-2008 @ 7:58PM
Jo said...
The terrible thing about the minimum distribution for those over 70yrs this year is that they have to sell funds in their IRA's that are battered and they get hit again by the taxes they have to pay on the min. distribution. Why doesn't congress give us a break on this and declare that at least for 08 we won't have to take the distribution or at least only take what we need.
12-23-2008 @ 8:17AM
George said...
I, like many others, have been hit hard by the financial disaster of 2008. I currently own several mutual funds in an IRA account that have taken a beating this year (2008). I have moved many of my funds into a "cash reserve" account in order to stem the bleeding but am still down at least 40% for the year. Can I take a "Tax Write-off" for the losses in my 2008 Income Tax or does that just apply if I cash out?