Tax-Loss Selling

Financial Dictionary -> Investing -> Tax-Loss Selling

Tax-Loss Selling is a financial strategy that involves selling bad investments, so that your loss turns in to a tax gain. It is a clever manipulation of the system and involves an investor deliberately making a loss on an investment to counteract their capital gains, in order to make a saving on income tax, which they would have had to pay if they still held the previous investment. This works because individuals are allowed to make deductions for capital losses against their capital gains, bringing down the income figure. You'll rarely make a profit using this system, but it is a way of cutting your losses and leaving with the best possible finance.

Utilizing capital losses is surprisingly flexible. For example, if there aren't enough capital gains this year to be offset by your losses, you can go back in any of the last three years and get a tax refund on any paid income tax. If there is still a difference you can bring it forward to the next year and save in the future.

Common investments used during Tax-Loss Selling include stocks and shares, mutual funds, bonds, an exchange traded funds. Sometimes even real estate is used.

To prevent tax fraud you will not be able to offset your losses if you sell a stock during the tax period and immediately buy it back within 30 days. You might also be denied if you only bought the stock within 30 days prior. It doesn't matter if you buy similar stock, just not the exact same.

Stock or other securities that have incurred a complete loss from bankruptcy can be used to make a capital loss without the sale of the investment. All that is required is an explanation of the situation with your tax return.