Capital Gains for Stock trading? Should I try and seek a loss before Dec 31st?

Question

How does the capital gains tax for stock trading work? I heard that you can deduct $3000 of your stock losses against your income when calculating your annual income tax. What I am not clear is the following:

1. If I started trading in stocks beginning July 07 and had a net gain of $1700 for the year, would it be better for me to keep this as a gain and get it taxed or should I realize some losses to clear out this gain (I have some stocks on my portfolio which are down, but I have not realized it as it is not sold).?

2. If my net losses are only $1 for the year from stock trading, would I be able to deduct $3000 against my total income or would I be able to deduct only the loss of $1?

Answer 1

1. If you have stocks where you have a loss so far and don't want to keep them, it makes sense to sell them now and take the loss against the gain you already have.

2. You can only deduct your net loss, in your example $1. If your net loss was over $3000, then you could only deduct the first $3K this year, and carry over the balance to the following year.

Answer 2

You net your gains against your losses. You want to have losses so that you pay less tax. If you have a net gain, then you recognize that. If you have a net loss, then you can deduct up to $3000 against ordinary income as you mentioned. You can't realize losses on stocks unless they are sold though. So you would basically have a gain of $1699 according to your information.

Answer 3

Short-term gains are taxed as ordinary income.

Long-term gains are taxed depending upon your income.

http://invest-faq.com/articles/tax-cap-gains-rates.html

As for selling stock to realize losses, you have to analyze the fundamentals and ask yourself if the reasons you purchased the stock continue to be valid. Also you need to be aware of the "wash sale rule."

http://en.wikipedia.org/wiki/Wash_sale