Why Tax loss selling is not the best idea for Volatile Stocks?

TaxGuru · #1 (**permalink**) 12-15-2007, 03:32 PM

I have had clients who own volatile stocks such as RIMM, BIDU, CSCO, GOOG and the new Winner for 2008 that is VMW!

Some of these clients bought these stocks recently, this is especially true for folks in the IT industry, they bought VMW but they paid between $89 through $118.. Now, they have asked specially what is the best tax strategy to take..!

The choice boils down to this, "I want to sell the stock to take the losses and I can buy back the stock after 30 days, so that the trade will not be considered a Wash Sale".. Correct!

But, what happens if the client say takes a loss of say $15 dollar per day and sells the stock (VMW) at current price of say $94.00. Now, after 30 days, that is January 15th, 2007, what happens if VMW enjoys a NEW YEAR's RALLY that takes the price past $130! The client now has to pay an incredibly higher price to get back into VMW, assuming he wants to get back into the original position.

If the 4th quarter earnings are excellent, one would expect the Stock price to further appreciate even more significantly!

Does it then make sense to sell your volatile stocks prior to year end and repurchase after 30 days resulting in the minimum purchase date after Jan 15th? Absolutely not in this case, especially when more mutual funds and institutions will be accumulating this stock.

In short, sometimes tax loss selling is contrary to common sense investment guidelines especially with long term winners with stocks that have expanding market share dominance, expanding profits, expanding international sales and expanded product offerrings!

Also, please click on the following link for discussion on "2007 tax strategy for stock losses incurred 2007"

http://www.asktaxguru.com/396-2007-t...ed-2007-a.html

presley · #2 (**permalink**) 12-15-2007, 08:04 PM

WOW! GREAT IDEAS EXPRESSED TAXGURU!

Ok! I see what you are saying with respect to VMW! I really want to keep this as a core holding for the next 3-5 years.. It is after all the next GOOG!!!

But, lets say I did buy 2 of the 4 volatile stocks that you mentioned in your article. For example specifically, I do own VMW and RIMM. I really don't want to sell either of them but it seems the current price is below my cost. In both cases, I am losing in excess of 15 dollar on average per Stock.

My CPA told me to sell these before December 31st so that I can write off the losses,"Tax loss selling " according to him. As such, I have sold stocks earlier in the year that resulted in substantial capital gains.

Would that not help me at tax time? Can I not deduct these losses against the Gains from the sale transactions of the stocks sold earlier in the year? Would Wash sale rules even for these instances where there are Gains to be offset and I am hoping that I can repurchase both RIMM and VMW immediately??

This doesn't sound fair if I am subjected to Wash Rules!!!!

Adam · #3 (**permalink**) 12-15-2007, 08:07 PM

Presley, the IRS couldn't care whether the Wash Rules are fair or not! They are concerned about the big boys abusing the rules.

I suspect you would be subject to the Wash Rules! The losses would not be deductible.

Daso · #4 (**permalink**) 12-15-2007, 08:10 PM

How would the IRS know that you made a Transaction that is subject to a Wash Sale Rule"? Just Curious!!!1

pinky · #5 (**permalink**) 12-15-2007, 08:46 PM

I am not going to sell my RIMM, BIDU and VMW no matter what especially so close to Tax year end..

Besides you can only offset $3,000 capital losses if you dont have any capital gains!
Its just not worth it in my opinion I would rather hold the stock for at least 1 year especially the NEW IPO VMW! Why bother selling???

TaxGuru · #6 (**permalink**) 01-14-2008, 12:56 PM

The IRS code allows taxpayer who sustain capital losses in excess of $3,000 to be able to offset these against other capital gains. However, as in your case, where you have no capital gains to offset these losses, Taxpayers are permitted to deduct $3,000 per year from their tax returns, with the balance carried forward to future years.

These losses are then available to be offset against other capital gains and if none exist, then another $3,000 loss is available for deduction in that year. Currently, the IRS has no restrictions on how many years these losses can be carried forward, so we can safely assume these losses can be carried forward indefinitely until they can be either offset against other future capital gains or until they are fully written off at a rate of $3,000 per year.