Tax-loss selling
involves selling a stock that has lost value specifically in order to realize
a taxable loss. The loss can be used to eliminate taxable gains, either long-term
or short-term.
Here is an example
of the benefits of tax-loss selling:
Stock A is purchased
at $100. It is sold six months later for $40, at a ($60) loss. Assuming 40% combined
state & federal tax rate, this loss leads to a tax savings of $24. After 31 days,
the $40 proceeds from the sale and the $24 tax savings are reinvested in the stock.
If the stock is still priced at $40, this buys 1.6 shares (see below).
Buy
stock: | $100 | |
Sell
stock: |
$ 40 | |
Taxable
loss: | ($60) | |
Tax
savings: | $
24 | |
Reinvest
proceeds: | $64 | ($40
sale proceeds + $24 tax savings) |
| | | |
$64
purchases 1.6 shares at $40 per share |
If
stock A's price goes back to $100, the 1.6 shares rise in value to $160. If the
1.6 shares of stock A are sold again in six months at $100 per share, the investor
clears $111.60, even after taxes, assuming a 40% combined state & federal tax
rate (see below).
1.6
shares sold at $100: | $160 | proceeds |
Cost
basis of 1.6 shares: |
$64 | |
Taxable
gain of: | $96 | |
After-tax
net gain of: | $57 | .60
($96 less 40% taxes) |
Plus
basis: | $64 | |
Total
after-tax proceeds: | $111 | .60 |
If the 1.6 shares
are instead held for one year, then sold at $100 per share, the investor clears
$135.04 after taxes, assuming a 21% combined state & federal tax rate for long-term
gains (see below).
1.6
shares sold at $100: | $160.00 | proceeds |
Cost
basis of 1.6 shares: |
$64.00 | |
Taxable
gain of: | $96.00 | |
After-tax
net gain of: | $75.84 |
($96 less 21% taxes) |
Plus
basis: | $64.00 | |
Total
after-tax proceeds: | $139.84 | |
In either case,
the initial investment of $100 has increased in value, after-tax, to either $111.60
or $139.84, even though the stock ends at the same price it began. If you would like any further information regarding this issue as well as any other tax related issue, please contact The Henssler Financial Group Tax & Accounting Division at 770-428-4025.
