I often mention about my biggest financial mistake till date, it was buying shares of a falling company while knowing it was too big to fail. When the company went in to bankruptcy, I lost a huge sum of money. That was the bad part. A not-so-bad part was the tax write-offs I claimed for next few years on that loss. This article is to remind you making note of all financial losses in 2013 and use them to lower tax burden.
If you haven’t done so, now is the time to file our annual tax return. There are two very important aspects you should understand before submitting your return this year.
- Wash sale
- Loss carry forward
Now, wash sale and loss carry forward impact not only traders, but also people who do occasional trading for quick gain. As I had said a lot before, trading is not exactly a good financial move, as opposed to investing in stocks for longer term. still, people do it and I believe people do more trading than investing. At least the people I know of.
If you happen to be one such trader who ended up 2013 in losing site, now it’s time to claim the loss in your tax return. IRS related articles can be found here and here
1. WASH SALES
When it comes to wash sales, it is important to know that your broker will report some of them, but others you must report. It is advisable in all of these situations to speak with a qualified tax professional.
A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:
- Buy a substantially identical stock or security
- Acquire substantially identical stock or securities in a fully taxable trade
- Acquire a contract or option to buy substantially identical stock or security, or
- Acquire substantially identical stocks for your individual retirement account (IRA) or Roth IRA
According to the IRS, “You cannot deduct losses from sales or trades of stock or securities in a wash sale.” If you do have a wash sale that has a disallowed loss, add the disallowed loss to the cost of the new stock or security (except in retirement accounts).
If the wash sale occurs in the same account, your broker will report it as part of your 1099-B. If they are in different accounts, taxpayers must report wash sale transactions as part of Form 8949 part I or II with the appropriate box checked. Your tax professional can help with filling out the appropriate boxes.
Tax year closing date does not cut off the 61-day wash sale period (the 30 days prior to the sell date and the 30 days after, plus the sell date itself). That means loss sales in December can trigger wash sales if the purchase occurs in early January.
2. LOSS CARRY FORWARD
We hope to make profit in every investment or trading decision we take at the end of the year, occasionally we may make loss. Surely not a very happy feeling but, when it comes to taxes, it’s surely a time for saving some money on taxes! If you have no gains, you can carry losses forward into coming years to offset future gains.
According to the IRS, the amount of your capital loss carryover is the amount of your total net loss that is more than the lesser of:
- Your allowable capital loss deduction for the year, or
- Your taxable income increased by your allowed capital loss deduction for the year and your deduction for personal exemptions
- If your deductions are more than your gross income for the tax year, use your negative taxable income in computing the amount in item (2)
If the loss exceeds your capital gains, the amount of the excess loss that can be claimed is the lesser of $3,000 ($1,500 if you are married and filing separately) or your total net loss as shown on your schedule D. If the net capital loss is more than this limit, it can carry forward to later years.
While preparing taxes, keep the following in mind-
- Short-term losses counterbalance short-term gains. If there were no gains, then obviously the net would equal the total loss.
- Long-term losses are applied to long-term gains.
- Combine the short-term and long-term results. A loss in one section can offset a gain in the other section. For example, if you have a net short-term loss of $2,000 and a net long-term gain of $1,500, then you’ll save taxes on $500. You can deduct up to $3,000 from other income.
- If you ended up with a loss of more than $3,000, you can carry forward the leftover portion to next year’s taxes. The unused loss can be applied to next year’s gains as well as up to $3,000 of earned income. A big loss can be used as a deduction indefinitely.
Readers, be honest, pay your taxes and save where the law allows you to save. Make every effort to file a correct return. Our tax money builds the nation and often it also feed poor, in terms of aids.