Harvesting Tax Losses
The Dynamic Wealth Report
December 10, 2008
Why You Need To Sell Your Stocks Now!
You need to sell your stocks now. I’m not kidding. Right now’s the time
to purge some stocks from your portfolio. But here’s the thing, you need
to be very selective in what you sell… and what you eventually buy.
Why now? Why the Urgency? I’ll explain in a moment.
But you must take action now. It’s the difference between a lot and a
little money in your pocket.
As a regular reader of the Dynamic Wealth Report you know I’m focused on
one thing. Making more money.
Anybody can give you a trade idea. But that’s just part of the solution.
Any savvy investor knows it’s not how much money you make on a trade…
It’s how much you get to keep.
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As a great trader once told me – “It’s only a profit if you can spend it
at Safeway.”
You can insert the grocery store of your choice into the above
statement. Despite its simplicity, the statement can’t be more true. Just because you’re sitting on a gain doesn’t make it a profit.
And don’t forget, just because you have a big gain doesn’t mean you get
to keep it.
Now, don’t be too confused by that statement.
What I mean is simple. Uncle Sam and all of his friends in the
government want their share of your profits. He’s the silent partner
nobody talks about. If you’re like me, I’m sure you pay more than your
fair share of taxes. I’ve paid more in taxes than I care to think about.
Just think of your tax bill every year for the last 10 years. In no time
you’ll see something amazing. A huge portion of your hard earned dollars
went right to the government.
Here’s the nice part about our tax system (if there is one). As
citizens, it’s perfectly legal to take any action to reduce our tax
bill.
That’s why selling stocks NOW is so important.
It’s a process called tax loss selling. Before we go any further let me
say this: I’m not a tax advisor, accountant, or tax attorney. I do some
of this in my own account, but please consult a professional for more
information.
Enough with the legal mumbo jumbo.
What is tax loss selling? It’s a simple process of selling stock showing
a loss. You “harvest” this loss and use it to offset other gains in your
portfolio.
Let me give you an example.
Let’s say you bought Citigroup (C) about 2 years ago. You probably paid
$50 a share for this position. So 100 shares would cost $5,000. Right
now Citigroup is trading for about $9 per share. If you’re holding this
stock in your portfolio you’re looking at a loss of $4,100. That’s huge.
You can sell this position and harvest the loss. You then offset other
gains you have with this loss on your tax forms. If you’re in the 28%
tax bracket you would pay Uncle Sam more than $1,100 on a $4,100 gain. By using the tax loss offset you don’t owe him anything!
See how powerful this strategy is?
Not bad… but what do you do with the money after the sale? How do you
reinvest the $900?
We’ll here’s the rub… unfortunately, you can’t just go buy Citigroup
stock. The IRS has rules against that. You have two other options. First
you can wait 31 days or more before buying back into Citigroup. The
stock might move a bit so you might pay more or less for the stock -
it’s a risk.
The other thing you can do is buy a similar investment. Maybe buy
another bank, or buy an ETF holding a basket of banking stocks. Just be
sure the new purchase isn't "substantially identical" to the old one –
that’s a big “no-no” in the eyes of the IRS.
Using this strategy you capture the best of both worlds… you harvest a
loss to shelter other tax gains and you continue your exposure to the
industry.
Now here’s a silver lining to a very dark cloud. If you have more losses
in your trading account than profits, don’t worry. Any losses can be
carried forward offsetting future gains.
As a matter of fact, I know an investor holding more than $100,000 in
“harvested” losses. I know it sounds crazy, but he’s optimistic those
losses will offset gains well into the future.
Don’t forget, this strategy doesn’t last forever. You need to sell your
securities before the end of the year to reduce your 2008 taxes. Take
action now. Don’t miss this opportunity to improve your overall returns.
• Wheat ($4.72 per bushel.)
Last week we noted wheat was range bound. Wheat broke
aggressively to the downside this week, closing well below the $5.00 per
bushel level. News out of Australia helped push prices lower. The
Australian Bureau of Agricultural & Resource Economics announced the
2008-2009 wheat crop would be 54% greater than 2007 production levels.
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