More information on Updegrave's new book.

NEW YORK (CNNMoney.com) - I'll get about $600 in interest from my CDs by the end of the year. Should I sell one of my stocks that has a $600 loss to offset the tax I'll owe on my CD interest, and then maybe buy the stock back later?

-- Josh, Chandler, Arizona

The timing on your question is perfect. As we head into the final weeks of the year, all investors should be poring over their portfolios with an eye toward selling stocks or funds which are trading for less than they paid for them so they can book a loss and trim their 2005 tax bill.

Of course, you can still sell for a tax loss after the end of the year. But if you hold off, you won't be able to deduct the loss until you file your 2006 taxes in early 2007. So if you're considering this sort of move, don't procrastinate.

Basically, the drill goes like this. If you own securities such as stocks or mutual funds that are trading for less than you paid for them, you can sell them to establish a capital loss.

You would then use this loss to offset any capital gains that you have, whether they're from other sales that resulted in gains or they're capital gains that funds you own have distributed to you.

If after offsetting capital gains with losses you still have a capital loss -- or if you have only capital losses and no gains -- you can then apply that loss against up to $3,000 in regular income you report, which would include income from wages, interest and dividends.

If your capital loss is greater than $3,000, you can carry it forward to future years.

Believe it or not, I've given you the abbreviated version here. In reality, the tax code requires that you go through a procedure of pairing short-term losses with short-term gains and long-term losses with long-term gains, after which you would then arrive at a net capital gain or loss.

For more on exactly how this procedure works -- as well as details such as the various worksheets you must fill out to figure your ultimate tax and how you go about carrying losses forward -- check out IRS Publication 550: Investment Income and Expenses.

So getting back to your question, the answer is, technically, no, you can't use your stock loss to offset your CD interest income. But if you have no capital gains, you can apply your stock loss against regular income, which would include the CD interest.

On the other hand, if you own other securities that are trading for more than you paid for them, you still have time to sell them between now and the end of the year to establish a gain that you would offset your stock loss.

Not that I'm suggesting you sell only for the sake of taking the gain. But it's certainly something to consider if you own a stock or fund that you've been thinking of getting rid of because you no longer like its prospects or that you're thinking of paring back your position in because it's become too large a part of your portfolio.

As to the issue of selling a stock for a loss and then buying it back, that can be a great idea if you still think the stock has room to run.

Just be sure, though, that you don't run afoul of the IRS's "wash sale" rules, which will disallow all or part of your loss if you buy the same security or a "substantially identical" one 30 days before or after the sale you made to establish a loss. Good old IRS Publication 550 spells out the specifics on wash-sale rules as well.

So sometime between now and the end of the year, it's a good idea to check your portfolio for those great ideas that didn't work out -- or haven't so far -- and to consider trimming your tax bill by selling them for a loss. Granted, that won't eliminate the loss. But the tax savings can at least take some of the sting out of it.

----------------

Walter Updegrave is a senior editor at MONEY Magazine and is the author of "We're Not in Kansas Anymore: Strategies for Retiring Rich in a Totally Changed World."

For all the latest headlines in Ask the Expert, click here.