Tax Guru-Ker$tetter Letter
Sunday, December 15, 2002
Here are some good tips on dealing with stocks that have declined in value. Some reminders:
To recognize a loss for tax purposes, you have to sell the stocks. Declines in portfolio value are not deductible, which is fair because portfolio gains in stocks still owned are not taxable.
Beware of the wash sale rule. You can't deduct a loss on stocks if you repurchase shares in the same company within 30 days of the sale. The non-deductible loss has to be added to the cost basis of the replacement shares. One way to get around this is to repurchases the shares through your retirement plan (IRA, SEP, 401k, etc) because IRS considers such plans to be different entities than the individual beneficiaries.
Donating to charity
It only makes sense to donate appreciated stocks to charity because you can deduct the full market value and avoid any capital gain tax. However, if the stock has gone down, you can only deduct the market value at the time of the gift; thus forfeiting the capital loss. It's a better plan to sell the stock, claim the loss, and donate the cash.