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Making stock losses pay off at tax time

May 21, 2012

Today was just the second day of trading for Facebook stock, but the consensus is that the company priced its initial public offering shares too high.

Facebook closed Monday, May 21, at $34.03. That was an 11 percent drop from the $38.23 it ended at on Friday. And that close last week was less than a quarter a share above the price set for the IPO.

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Today's drop in price means Mark Zuckerberg's personal fortune fell by around $2 billion. But don't worry about him, the newlywed social media mogul is still worth more than $17 billion.

Plus, Zuckerberg is going to be patient.

The big question is will other Facebook shareholders be willing to give the company time?

When it comes to investing in any stock, financial experts generally advise long-term planning. The reason is twofold.

First, markets and individual stocks go up and down all the time. Folks who try to time their way in and out of investments more often than not lose money.

Secondly, if you wait to cash out and make a profit, you'll face lower taxes.

The current rate on long-term capital gains — assets held for more than a year before being sold — is 15 percent for most taxpayers. For those in the 10 percent and 15 percent tax brackets, there is no tax due on long-term sale profits.

The tax value of bad investments: If, however, you sell a stock or other capital asset for a loss, that also has some tax-saving potential.

You can use your capital losses to offset any capital gains you have during the tax year.

Short-term losses are first subtracted from short-term gains, which are the proceeds from sales made before the 366-day threshold. These profits are taxed at ordinary income tax rates, which could be as high as 35 percent.

Similarly, long-term losses are used to reduce or totally eliminate long-term gains.

If you have some leftover losses in either category, you can use them to net out any remaining gains you might have in either the long- or short-term areas.

You'll have to fill out Form 8949, a new form that appeared with 2011 tax year filings, and the old standby, but redesigned, Schedule D to show the Internal Revenue Service exactly how your losses apply to your gains.

A really bad trading year: What if you still have some stock losses after wiping out your capital gains? You can use up to $3,000 of the losses to reduce your ordinary income.

Got more than three grand in negative accounting on your share sales? You can carry these excess losses forward to future tax years.

Of course, by the time you use them all up to reduce your tax bills, you also should have a new financial adviser, too.

You also might find these items of interest:

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The More Tax Posts tab at the top of this page will take you to, well, more tax posts. You also can search below for a tax topic. 

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TAX-SAVVY WAYS 
TO WRAP UP 2026

It’s over! With October’s extended filing deadline behind us, it is now time to focus on year-end moves to reduce your 2026 tax bill. 

You’ll find ways to do just that on the Tax Tips page (see the More Tax Posts drop-down menu at the top of the blog), as well as the separate tax tip pages for each month, notably October through December. If you’re on the Tax Tips page, you’ll find a monthly list at the end of this column. If you’re on another blog page, you can head straight to the October tips; at the bottom of that tips page you’ll find links to all the other 11 months’ collections of tax advice.

Not to spoil what you’ll find in that tax advice, but it does cover such things as tax deductions for charitable donations, investment moves that could reduce tax due, and ways to max out your tax-favored retirement savings. 

Finally, as the year winds down, things get hectic. There are lots of other things to occupy our time, like the much more fun upcoming holidays. But don’t lose sight of taxes, since timing is key. To be of use, most tax moves must be made by the end of the tax year. That’s Thursday, Dec. 31, which also is the last business day of the year. 

So that you don’t miss that final tax year deadline, also keep an eye on the countdown clock below. It will keep you on top of just how much time is left to make important, tax-saving moves. (Note: I’m in the Central Time Zone, so adjust accordingly for where you live.)

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