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Tips on selling at a loss
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November 30, 2000: 3:11 p.m. ET
Stock losses can offer tax breaks, but it pays to mind wash-sale rule
By Staff Writer Jeanne Sahadi
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NEW YORK (CNNfn) - With one eye on the calendar and the other on the market blazing a red trail south, you realize now may be the time to make lemonade of your stock losses for the year.
As painful as it was to watch Dell, Lucent, AT&T, Wal-Mart, Home Depot or countless others sucker-punch your portfolio in recent months, you may be able to give yourself a tax break if you use your losses to offset any capital gains.
"There is something valuable in the loss," said Hugh Johnson, chairman and president of First Albany Asset Management, which manages $622 million in private accounts.
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 SELLING TO TAKE A LOSS? CHECK YOUR WATCH
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The wash-sale rule says in essence if you sell a stock or security at a loss you will not be allowed to take that loss on your taxes if you buy the same stock or security 30 days before or 30 days after the sale. That's a 61-day period (including day of sale) that you must refrain from purchasing the holding.
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In deciding whether to take a loss on a stock, it's important to keep in mind the wash-sale rule, especially if you are thinking you would like to restore your position in those holdings before year-end.
The wash-sale rule says in essence if you sell a stock at a loss you will not be allowed to take that loss on your taxes if you buy the same stock 30 days before or 30 days after the sale.
So if you've been bargain-hunting in the past month for some of your portfolio's weaker players, you won't be allowed to take the loss when you sell some of your longer-held shares in those companies. Likewise, if you want to snap up Lucent or Dell at fire-sale prices come the end of December even though you just sold your holdings in those firms, you would do better to pick up the stock sometime in January or any time following the 30-day, after-sale period.
Keep in mind, "Capital losses are allowed to the extent the you have capital gains plus an additional $3,000," said enrolled agent Cindy Hockenberry of the National Association of Tax Practitioners. If, say, you have $10,000 in capital losses and no capital gains this year, then you can claim only $3,000 in losses for 2000.
But you can carry the remainder over to future tax years. So if you have $7,000 left over in losses from this year, and you incur $10,000 worth of capital gains next year, you can deduct the full $7,000 in losses against those gains in 2001, Hockenberry said.
For wash-sale rule violators, a postponed benefit
If you violate the wash-sale rule, you still might be able to get some advantage from the loss, although it will be postponed.
Poll: Time to book losses?
"You get some benefit from the loss you couldn't take by adding it to the cost basis of the replacement (shares)," she said.
That means you can declare a higher cost basis for the replacement stock you bought. And that may increase your chances of taking a loss on those newer shares when you sell them.
Mind those mutual funds in the red
The wash-sale rule also applies to the sale of mutual funds, said Ed Slott, a certified public accountant and an IRA expert. But you have a little more flexibility given the nature of the beast. If you sell a growth fund at a loss but still want to maintain your asset allocation in growth stocks, you can replace that losing fund with another growth fund in less than 30 days just so long as it is not the same fund you sold, Slott said.
But beware, he cautioned. While your mutual fund may be posting a negative return for the year, that doesn't mean you won't get slapped with capital gains since the portfolio manager may have sold a number of the fund's stock holdings that incurred gains. And those gains will be distributed to shareholders.
You should receive statements every time your fund distributes capital gains, said Morningstar fund analyst Kunal Kapoor. But if you're unsure about the distributions, you might call the fund company for the most recent information. 
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