The stock market is a lot like sports. Just as an undefeated season is a rare feat for any team, a stock portfolio without losses is virtually unheard of for investors. While nobody likes to lose, it is important to know how to handle a loss in the stock market. When it comes to your portfolio, there are ways to minimize the impact of a loss and maximize the tax advantages you can gain from it.
Minimize the Damage
In other words, know when to cut your losses. If a stock has been depreciating, you may start to consider unloading it. A good test is to ask yourself – would you buy the stock today at its current value? If the answer is no, maybe you should sell it.
Maximize the Loss
How can a loss turn into a win when you’ve lost money? The answer is on your tax return. Stock losses allow you to remove some income from your return. There are two ways to do this.
The first is by using the loss to offset capital gains. In order to do so, you must understand capital gains taxes. A loss in the stock market is known as a capital loss. The good thing about capital losses is that they can be used to offset capital gains and reduce the amount of capital gains tax owed. For example, if you earn $7,000 from the sale of a stock in ABC Company, but lose $7,000 from the sale of stock in XYZ Company – your capital loss counterbalances your capital gains and you will not owe any tax on the capital gains.
The second is to use the loss to offset your income. If you do not have any capital gains, you can use capital losses to reduce your income – up to $3,000 per year. And if losses exceed $3,000 you can carry losses forward to future years. Therefore, if you suffer a giant loss in the stock market, it could reduce your tax burden for several years to come.
Knowing the ins and outs of handling a loss in the stock market is important for any investor. While the basic concepts are simple, there are many more complex options and calculations that allow losses to offset some of your income and earnings. For more information or help in managing your portfolio and tax obligations, contact us at (215) 497-8888.