Capital Losses -- a tax odyssey
Jan 28 '02 (Updated Feb 01 '02)
The Bottom Line You have a capital loss when you sell something for less than you paid for it. They are sometimes deductible on your income taxes.
The key word is loss. You have a capital loss when you sell something for less than its basis, generally what you paid for it.
Of course, there are exclusions and inclusions. This is income tax, after all.
Exclusions
Losses on personal use property are disregarded. Your home(s), car(s), and computer(s) are usually examples of this.
Losses on a sale to a "related party" are disregarded or deferred until that party sells the property. (I could never figure out which.) If disregarded, that party uses your basis as his/her basis for the purpose of gain/loss and long-term/mid-term/short-term calculations. If deferred, you take the loss when he/she sells the property.
Losses are deferred if you buy the same or "similar" property within 30 days of the sale, either before or after. The loss is added to the basis of the purchased property.
Losses and gains are usually disregarded on sales between husband and wife, and on property transfers incident to a divorce.
Losses and gains on sales of business inventory are ordinary losses and gains, rather than capital losses and gains.
Some losses on sales of business assets are ordinary losses rather than capital losses. See form 4797 for details.
If you exchange your business property for property with the same use, you may be able to defer the gain or loss. (There could be reasons to defer the loss -- it's not totally ridiculous.)
Inclusions
If property is completely worthless, you can claim a capital loss in the year it becomes completely worthless, and only in that year. Examples are expiring options and stock in bankrupt companies, but only after the bankruptcy court rules the stock is worthless. If you have Enron shares, you can't take the loss yet. (If you have nearly worthless stock, many stockbrokers will take it off your hands at a nominal price equal to the commission, so you can claim the loss.)
Short sales (when you sell a stock, and then buy it back) can result in either a gain or a loss.
Non-business loans that you made can be written off as a short-term capital loss when they become completely uncollectible. The rules are similar to the rules for worthless stock, except you must also make a reasonable effort to collect the money. A further note -- be sure to file a 1099-C (cancellation of debt) with the IRS and the deadbeat. That way, he may have to pay taxes on the money he now has permanently borrowed.
What good does it do me?
Net capital losses by an individual taxpayer (losses reduced by gains) are subtracted from your gross income, up to a limit of $3,000 ($1,500 if married filing separately) per year. ("C" Corporations can deduct nothing, and estates, trusts, and "S" corporations can pass the loss to the beneficiaries.) The excess can be used in future years until death.
It used to be the case that long-term capital losses were discounted, and only 50-60% was subtracted from your taxable income. That is no longer the case -- a loss is a loss.
Notes on carryover
If your taxable income is reduced to less than 0 by an allowable capital loss, before considering exemptions, then the excess reduction can be carried over to future years. For example, if you have only $2,000 of income disregarding capital losses, and a $3,000 capital loss, then you can carry over the excess $1,000.
Also, capital loss carryovers are individual attributes, even on joint returns. Only the limits on use are joint. As an example, if you have $10,000 in capital loss carryover coming into a marriage, while your spouse is a better investor and doesn't have a capital loss carryover, you file jointly for two years (using $6,000 of the carryover), and then divorce, you have the $4,000 carryover on your individual return. If you die (rather than divorce) in the 3rd tax year, then the $4,000 carryover is lost.
A note on the title
For those who have been living in a cave for the past 20 years or so, you might need to be reminded that there was a movie 2001: A Space Odyssey. For those who have been living in cave since September 11, you might need to be reminded that the stock market had a great reduction of value on that date.
 |
|
|
|
|
|
|
Epinions.com ID:
Arthur.Rubin
|
 in Personal Finance |
 in Personal Finance |
 - Top 500 |
|
Member: Arthur Rubin
Location: Brea, CA, USA
Reviews written: 97
Trusted by: 109 members
About Me:
Expert in mathematics, computers, income tax, with a wide variety of interests.
|
|
|
© 1999-2009 Shopping.com, Inc.