With the stock market ending in the red for the second year in a row, Eugene Mahr of Newton plans to sell a losing investment -- a tech stock -- by Monday's year-end tax loss-selling deadline.
"I have a couple of thousand in losses. There's no reason I can't use it to offset some gains," said Mahr, 45, former vice president for an Internet start-up and former Polaroid marketing director who's now doing consulting work between positions.
Ken Depperman, 67, a retired coast guardsman on the South Shore, recently sold the remaining shares of his Fidelity Select Developing Communications fund, which is down more than 30 percent this year, after having sold some of it last year for a tax write-off.
And since November, Eugene S. Tarsky, a Norwood certified public accountant, has been busy with the 20 to 30 percent of his clients selling investments for tax losses. "This year, there's much more heightened interest in selling," said Tarsky, who says he'll be working long hours through New Year's Eve.
With the 1990s bull market fading into memory -- and with the first back-to-back losing years in the stock market in decades fresh on people's minds -- buying hot IPOs is out, and selling losers is in.
Like Mahr and Depperman, countless investors are unloading shares. And financial professionals are helping clients understand the intricacies so that they don't run afoul of the so-called wash-sale rule, which means the Internal Revenue Service disallows some or all of the loss for the year.
By selling losing investments, investors can offset capital gains from a stock or mutual fund -- plus write off up to an additional US$3,000 against ordinary income for the year -- under US tax law. Any capital losses beyond that can be carried forward.
That means an investor who realizes losses equal to gains may not have to pay any capital gains tax. And that means an investor who has an additional US$3,000 in losses to write off against ordinary income may save up to US$825 in income tax, presuming a 27.5 percent tax bracket this year.
While these tax rules have been on the books for years, prompting an annual rush to sell in December, this year has a particular "now or never" feeling because of the widespread market losses and tax changes that will reduce future tax savings from selling losing investments.
For instance, with marginal tax brackets starting to drop next year, courtesy of the tax cut signed by President Bush, that same US$3,000 in losses against ordinary income in 2002 would net only US$780 in tax savings, compared to US$825 thsi year, as the 27.5 percent bracket drops to 26 percent.
Some financial specialists think this December's sales volume will be lighter than December last year because so many investors took their lumps last year to offset capital gains earlier in 2000.
"Basically, you don't have those kinds of gains this year. We've had 18 months of a pretty nasty bear market," said Donald Cassidy, senior research analyst at Lipper, a mutual fund research firm, and author of It's When You Sell That Counts.
Investors may not need to worry as much about taking losses against gains this year. Lipper estimates that overall, mutual funds will report about a 70 percent lower capital gains distribution this year, of US$100 billion, compared with last year's US$325 billion.
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