Capture Those Investment Gains Tax Free
Many investors experienced tremendous losses in their investments during 2008 and 2009. What is more, many of them realized those losses when they sold their investments and moved the money into bonds and cash. If you were in that group, you likely had far more capital losses on your tax return in those years than you were allowed to take against your income in those years.
The rules of the tax code only allow you to claim $3,000 more in capital losses than you had in capital gains. So in any given year, no more than $3,000 in capital losses can be subtracted from other, ordinary income when calculating your taxable income. For those who have more losses than $3,000, the remaining amount gets carried over to future years when there is a gain, or if there is no gain, to be used $3,000 per year until the loss carry over is gone.
The good news is that most investors who had significant losses in 2008 and 2009 have also experienced significant gains this year. If that is the case for you, you can realize some or all of those gains tax free this year. Any net gains that you have, up to the amount of loss carryover that you have, will not be taxed at all.
Now is a great time to analyze your portfolio for those investments that appear to be topping out and sell them for a tax free gain. Even if you don’t want to sell the investments that you are holding, because you believe they will keep going up, you could sell them and immediately turn around and buy them back. This will capture the gain tax free now, and increase your basis in the stock going forward.
One other great reason to consider capturing gains now – even those in excess of your loss carryovers – is that many taxpayers are in the 0% tax bracket on long-term capital gains, which ends this year. Once you exceed the 0% bracket, the long-term gains are still only taxed at 15%. It is not likely that the 0% bracket will be extended in future years, especially those years beyond 2011. This could be another way in which to capture tax free capital gains in 2010.
Of course, you should consider the transaction costs and other factors of this strategy before moving forward. And it should go without saying that taxes are only one of many considerations that should be made when deciding to sell an investment.