With many stocks meandering near the end of the year, some stocks in your portfolio may be as useful as your depleted fantasy football team. However, while these underperforming stocks may cause you some heartache, they could actually be a ray of sunshine when tax season comes around this spring.
Essentially, if you sell stocks at a loss, you may be able to use these losses to offset other gains in other investments. Even unexpected gains from employment (i.e. year end bonuses) could be protected from excessive taxes if underperforming stocks or other investments are sold. This is because you will have experienced a capital loss; the sale of a stock or other security for less than what you initially paid for it.
Think of it as the opposite of a capital gain. This is when you sell a stock for more than what you paid for it, so you will end up paying a tax on the income you have earned. But when you lose money on a similar investment, there is no tax to be gained. In fact, the loss lowers what your taxable income would be.
Indeed, there are limits to what you can claim as a capital loss, and there may be the need to carry over losses to future tax years. Nevertheless, it is helpful to understand that colossal gains that may create unexpected tax bills could be mitigated by including losses. If you have questions about how capital losses can be included on your taxes, an experienced attorney can help.