Tax-loss selling involves selling a stock that has lost value in order to realize a taxable loss. The loss can be used to eliminate other long-term or short-term taxable gains.
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 and 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 and federal tax rate. 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: |
$57.60 |
($96 less 40% taxes) |
Plus basis: |
$64.00 |
|
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 $139.84 after taxes assuming a 21% combined state and 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.
