Stock loss tax break Credit

[mariaefletes]

Has anyone heard about the "Stock loss Tax Break Credit"?

[RitaB]

Not me

Has anyone heard about the "Stock loss Tax Break Credit"?

My hairdresser did not mention it when I got my hair cut this morning.

[Koss]

Capital Loss

Okay, I'll engage in some speculation on this one...

You are probably dealing with a client that does not understand the difference between a credit and a deduction.

The same client also does not understand that you cannot take a capital loss on stock that has dropped in value unless you have actually sold the stock. In other words, he doesn't understand the difference between an unrealized loss and a realized loss.

So he bought $10,000 worth of some mutual fund a year or two ago, and now it is only worth $6,000. And he's talking to his barber about how the value of his investment went down, and his barber says, "You know, my brother lost money on stocks like that, and he said he got a tax break on it. You should talk to your accountant about that..."

The part that he left out is that his brother sold the stock before the end of the calendar year. So the barber's brother has a $3,000 capital loss, and probably some carryover for the following year.

If your client is still holding the stock that lost money, then for tax purposes, his loss has not yet occurred. When he finally decides to sell the stock, he might actually have a gain.

One client I have was holding shares in an Asian index fund that had lost value over the last few years. He sold the stock in late December in order to get a tax loss. Then, just a few days later, he bought shares in a similar index fund--but not the same one, because that would have made it a wash sale.

BMK

[RitaB]

Ain't it funny

Ain't it funny that they never tell us that their stocks went UP in value, but when they go DOWN, they figure they must get a break somehow?

[Gary]

Wash Sale

It's still a wash sale if he buys substantially identical stock or securities.

[erchess]

Yes but

It's still a wash sale if he buys substantially identical stock or securities.

Two mutial funds offered by different companies do not become substantially identical just because they share the goal of tracking a particular index or other target. At least I would be caught arguing that in the unlikely event it ever came up in an examination.

[Koss]

Wash Sale

With my client, the two funds were not even tracking the same index. There are meaningful differences in the holdings of the two funds.

With that being said...

There are some index funds out there that could be construed as "substantially identical," because they do track exactly the same index. The holdings, at least in theory, should be identical. There will be minor differences in the fees, and in the tracking error. No fund can perfectly mirror the target index, and the margin of error varies from day to day. The two funds might use slightly different software, and a slightly different model, to track the index, so there will be tiny variations. But for all practical purposes, the performance over time should be virtually identical. The fees will not be identical, but the industry is so competitive that the fees will be very, very close.

At the risk of stating the obvious, the best example is that there are at least two popular exchange-traded funds that track the S&P 500 index: SPY and IVV.

Are these "substantially identical" securities for purposes of a wash sale?

I dunno...

If you sell one of them short, you better not try to deliver the other one.

And if you own IVV, you can't write a covered call in SPY.

They are not identical.

But under the tax law, they might be substantially identical within the meaning of a wash sale...

BMK

[Koss]

SPY vs. IVV

Got curious about this, and ran across a four-year old article that discusses some very technical, but very important differences between these two funds.

If you are a long term investor, and you're just going to drop $5000, or $50,000, into an index fund and leave it there for a couple years, or longer, you won't notice any meaningful difference between these two funds. They both mirror the S&P 500, and they do it very well.

But if you're doing anything kinky that involves options, selling short, or any other kind of hedging, these two funds are definitely not the same.

Here's the link:

http://seekingalpha.com/article/109780-investing-in-the-s-p-500-spy-vs-ivv

BMK

[S T]

Not really a Credit -- I don't really think there is a "Stock Loss Tax Credit" as asked in the OP --- There are Capital Gains/Losses

Could it be nothing more/less than end of the year selling off investments

Neting Capital Losses to Gains for the year

Prior to 12/31/ of the tax year (calendar based) sell stock and take the loss - to net against gains on other stocks sold at a gain through out the year.

Sandy