Losses Incurred

Finance a la shmoop what is tax loss selling okay it's been a great year

overall you own a dozen stocks eleven of them are up nicely one however is a pig [Stocks appear]

down big there's a week left in the year before the taxman closed with his books [Calendar of year appears]

and gains and losses are calculated for tax purposes well of the 12 stocks you

own one has gotten really pricey now trading at eighty times earnings and

it's making you really nervous as you know that Dell if they don't have an [Company earnings graph appears]

awesome earnings every quarter the stock will get cut in half or worse so you

have a thousand shares of chap my hide a company that sells leather scented

chapstick the stock is now at 80 bucks 80 grand worth which you bought three

years ago for ten grand or ten bucks a share huge $70,000 gain nice work but

you know that if you sell it since you live in a high tax blue state you'll pay [California highlighted blue]

dearly about 35% tax on that gain or almost 25 grand in taxes leaving you

just fifty five thousand dollars in cash after the sale well luckily you

carefully watched this video and you know about tax law selling in this case [Tax loss selling video appears]

well you have one big fat pig there to draw from ok another stock yeah a

totally different outcome the pig you paid 50 grand for scratch-and-sniff [Scratch and Sniff diapers appear on the shelf]

diapers when you bought your 2000 shares at 25 bucks each two years ago fifty

grand and now after SSD shockingly missed [Actual earnings appear on company graph]

three-quarters earnings estimates in a row while the stocks down to three bucks

a share basically just the two dollars of cash per share the company holds plus

$1.00 to value everything else the company has had to abandon its plans to [Person scratches sock]

expand into scratch-and-sniff dress socks so well this is a big blow but for

some reason you still believe in the company and want to buy the stock back

someday you have way more than a month before this pig heals itself if it ever

in fact does and if you bought it back sooner than a month after you sold it [Man scribbles bought back into calendar date]

well then you wouldn't get credit for that tax law sale because you would have

violated the wash sale rule which says that you can [Wash sale rule appears]

sell a stock and then buy it back within 30 days claiming it as a loss with the

IRS to then pay lower taxes so you've lost hope you're ready to take your

losses in lumps and just sell it and that's usually a good thing to do here

with tax loss selling you just sell your shares for 3 bucks each booking a loss

of 22 dollars a share times 2,000 shares or 44 thousand dollars in losses [Tax loss selling equation appears]

well that 44k directly offsets the gains that you realized with chap my

hide so from the IRS perspective you won't pay taxes on the 70 grand of gains

you made from the sale of CMH you'll subtract the 44 grand of pig losses from [Tax loss selling formula appears]

that 70 grand of gains and pay long-term gain taxes on the realized gains of 70

minus 44 or $26,000 your blue state 35% tax still applies but now it's on a much

smaller base as you multiply 0.35 times 26,000 and you'll get about 9 grand in

taxes much easier to digest than the 25 grand you are gonna have to pay

otherwise so yeah that's what happens when you've got a pig that's a badly in [A pig rolling in the mud]

need of a wash