Investment Losses: A Silver Lining?

Presented by the Hardee Investment Group and RBC Wealth Management

Understanding the tax basis of investments and the tax rules regarding capital losses can help you reduce your income and taxes. You can do this by generating losses to offset income or gains and by generating income or gains to utilize unused losses. You usually don’t have a gain or loss for tax purposes until you sell an investment. Therefore, you have a certain amount of control over the taxation of capital gain income.

Put very simply, the sale of investments and investment property generates a capital loss when the asset is sold for less than your adjusted basis in it. Although there are exceptions, adjusted basis generally refers to your cost, plus or minus certain adjustments.

Let’s assume Hal purchases 10 shares of ABC stock in year one for $10,000. By year five, the fair market value of the stock has dropped to $8,000. Because Hal needs cash, he sells the stock in year five for $8,000. He has a capital loss of $2,000 ($8,000 sale price – $10,000 basis).

With one exception, capital losses can be used only to reduce or offset capital gains tax. Capital losses must be netted against capital gains according to specific ordering rules. Excess losses can then offset up to $3,000 of ordinary income per year ($1,500 if you are married and file separately), assuming your taxable income is at least as much as the deduction. Losses remaining after the limit may be carried forward indefinitely to offset future income.

Assume you had $5,000 in capital gains this year, but your capital losses amounted to $12,000. You could apply $5,000 in losses to offset all of your capital gains. You could also apply $3,000 against your ordinary income, thereby reducing it. The remaining $4,000 in losses could be carried forward to next year.

Planning your year-end investment decisions with an eye to taking advantage of capital losses is important. If you expect to recognize a capital gain this year, you should review your investment portfolio for possible capital losses to offset it. If you have any capital losses that can be carried forward to next year, you should review your portfolio for capital gain opportunities to make use of the capital losses.

Worried you’re not making the most of your capital losses? Call us today at 713-853-0879. Let us take a closer look at your portfolio to see if we can find the silver lining for you.

The views presented herein are solely those of H.H. “Will” Hardee, and do not necessarily represent the views of RBC Wealth Management. Current status of issues discussed in this letter is subject to change based upon market conditions and industry fundamentals. Clients should work with their Financial Advisor to develop investment strategies tailored to their own financial circumstances. Past performance is no guarantee of future results. The name Hardee Investment Group refers to a group of Financial Advisors working in the Houston, Texas office of RBC Wealth Management. The Hardee Investment Group is not a separate legal or corporate entity. All services offered and all memberships referenced in the presentation refer to the services offered or registrations held through RBC Wealth Management. RBC Wealth Management is not a tax advisor. All decisions regarding the tax implications of your investments should be made in consultation with your independent tax advisor. RBC Wealth Management, a division of RBC Capital Markets Corporation, Member NYSE/FINRA/SIPC.