Your tax questions answered: Investments

your_investments.ju.top.jpg By Amy Feldman, contributor


(MONEY Magazine) -- Late last year you caught a break. Congress reached a deal that extended the Bush-era tax cuts for two years and renewed perks like the sales tax deduction and the tuition write-off for non-itemizers.

Through 2012, the top marginal income tax rate will continue to be 35%, and you'll keep paying just 15% on long-term capital gains and qualified dividends. Plus, in 2011 your paycheck will be a little plumper, thanks to a cut in the payroll tax.

While no one knows what 2012 will bring, this year-end resolution makes planning easier than when rates were in flux. No need to scramble to lock in gains or postpone deductions. But even if Congress eliminated short-term uncertainty, it did nothing to wipe out long-standing confusion about the tax code.

With the filing season underway, MONEY asked readers to share their toughest tax challenges.

From the more than 1,000 questions you submitted, we picked the investing, filing, retirement, home, and small-business topics most likely to lead you off course.

Here are the answers to the most common investment questions.

1. I sold a stock with a $7,000 loss to offset my gains. Will I be able to offset short-term gains as well as long-term ones? -- E.R., San Antonio

You can pair capital losses with capital gains to avoid taxes -- with $7,000 in losses, you can shelter $7,000 in gains.

The rules get a tad trickier when the gains and losses are a mix of short-term (owned for one year or less and taxed as ordinary income) and long-term, which qualify for a 15% rate.

You must first offset short-term gains with short-term losses, and long-term gains with long-term losses. After that you can match short with long.

If you have more losses than gains in any given year, you can use up to $3,000 to reduce your taxable income, a write-off that can save you more than $800 if you're in the 28% tax bracket.

Then you can save the remainder for future tax years. The ability to carry over losses is why many advisers argue for stockpiling some when times are bad, and why leftover losses from 2008 remain valuable today.

With the market up strongly over the past year, old losses may come in handy when you sell winners to rebalance your portfolio.

2. Can I offset my gains in a commodity or gold with stock losses that I carried over? -- D.S., Bay City, Texas

Gold investors who enjoyed 29% gains last year are now facing a potentially big tax bite.

Gold -- like art, stamps, and antiques -- is typically considered a collectible, with a special long-term capital gains rate of 28%. This is true not just for coins, but also for some of the most popular gold exchange-traded funds.

Gains on other commodities, such as oil ETFs, are generally allocated 60% long-term and 40% short-term, regardless of how long you owned the investment.

You can offset your golden gains with losses on stocks and funds. But since stock losses are not in a special category, they must first be matched against other "non-special" gains, explains Kaye Thomas, author of "Capital Gains, Minimal Taxes."

Those include gains on other stocks and anything else subject to a 15% tax rate. After that, stock losses can be used to shelter your gains in commodities and gold.

3. How do I find out my cost basis for stocks that had dividends, reverse splits, acquisitions, mergers, and so on? -- Ronald Lippman, Buford, Ga.

Calculating your cost basis -- the number that determines your taxable gain or loss -- can be thorny.

At its simplest, it's what you paid for the stock, plus your commissions and fees, but you need to adjust for all kinds of things that have happened since, from reinvested dividends to spinoffs.

Help is on the way, but too late for you. Starting next year your broker will have to include your cost basis for stocks you sold on the 1099B.

Until then you may be stuck with reconstructing what you paid. "If the stock was publicly traded, you can find out what the basis was with a reasonable degree of certainty," says Justin Ransome, a partner in the national tax office of Grant Thornton.

As long as you know when you bought the shares, you can find a price that's adjusted for dividends and splits at sites like finance.yahoo.com. For investors who buy and sell often, software such as TradeLog ($69 for 200 trades a year) can help.

Additional reporting by Anne C. Lee contributed to this article. To top of page

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