Personal Finance

Money Matters: How to calculate taxes on losses, gains across different investment types

Q. Earlier this year, I invested around $100,000 in the energy sector via individual oil and gas stocks. As you can imagine, this portion of my portfolio has had a very negative impact on my year-to-date performance. On a brighter note, I finally sold some investment property in February and have a pretty nice gain from that sale. Should I hold on to my energy stocks and wait until this sector comes back or cut my losses and get out? Would the stock losses offset gains from my investment property? If so, would it make sense to sell? And if I think the energy sector will come back, can I sell and then buy back the stocks? Does it matter that my gains from my property are long-term, and if I sell the stock they will be short-term losses?

A. I hear you, as some stocks in the coal industry have lost more than 50 percent of their value this year. In general, losses from any type of investment can offset gains from any other type of investment. If you have gains from your investment property, it may make sense to offset these by selling your energy stocks at a loss. The short-term losses will offset any long-term capital gains dollar for dollar, and an additional $3,000 of losses above that amount can be used to reduce taxable income.

When you sell an asset for more or less than your cost basis (the amount you paid for the asset) you will have a taxable capital gain or a capital loss. If you incurred brokerage commissions, reinvested dividends, reinvested capital gains or made improvements to property, these amounts are added to what you paid for the asset, and this adjusted cost basis is used to calculate gains or losses. The amount of gain or loss is determined by subtracting the adjusted cost basis from the proceeds of the sale.

If the asset is held for one year or less before being sold, the gain or loss is short-term. If the asset is held for longer than a year before being sold, the gain or loss is long-term. Short-term capital gains (STCGs) are taxed at ordinary income tax rates. Long-term capital gains (LTCGs) are taxed at the more favorable capital gains rates. LTCGs in the 15 percent or lower tax bracket will not be subject to any federal tax. LTCGs in the 25 to 35 percent tax bracket will be taxed at 15 percent, and LTCGs in the 39.6 percent tax bracket will be taxed at 20 percent.

When selling a stock or mutual fund for a loss and considering buying it back, you have to follow the “wash sale” rule. A wash sale occurs if a stock or fund is sold at a loss and within 30 days before or after the sale substantially identical stock is acquired. If this occurs, the deduction for the loss is then disallowed. You may be able to buy a similar but not identical stock or fund and not be in violation of the wash sale rule. Example: You could sell your oil and coal stocks and immediately buy an energy mutual or exchange traded fund without violating the wash sale rule. Losses not subject to the wash sale rule can be used to offset taxable gains dollar for dollar and up to $3,000 of ordinary income.

A brief discussion with your tax professional regarding this and other end-of-year tax saving strategies may be of benefit.

Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624

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