Welcome back to another edition of "Speaking Mathanese," our Motley Fool series that tackles financial math myths. Here, we deconstruct the computations that make the biggest difference to your bottom line.
This week, our quest to make you smarter than a fifth-grader has us once again helping you to cope with your investment losses.
The myth
Remember last week's question?
What happens if you have short-term gains and long-term losses, or vice versa?
Let's stick with our examples, but with some modifications to our net losses:
|
Company |
Capital Gain |
|---|---|
|
Amazon.com |
$3,071.00 |
|
Boeing |
$1,109.00 |
|
Microsoft (NASDAQ:MSFT) |
$1,670.00 |
|
Procter & Gamble |
$820.00 |
|
Volcom (NASDAQ:VLCM) |
$1,792.00 |
|
TOTALS |
$8,462.00 |
|
Company |
Capital Loss |
|---|---|
|
KB Home |
$1,926.00 |
|
Panera Bread (NASDAQ:PNRA) |
$3,329.00 |
|
RealNetworks (NASDAQ:RNWK) |
$1,247.00 |
|
Sirius Satellite Radio |
$800.00 |
|
The Children's Place (NASDAQ:PLCE) |
$1,448.00 |
|
TOTAL |
$8,750.00 |
We already know not to add these two numbers together. Instead, we must compare short-term gains with short-term losses, and long-term gains with long-term losses, per the rules of tax-loss selling.
The math
But our example complicates matters further. Remember, we're assuming that Amazon and Boeing were long-term gains (held for at least one year plus one day) and that Microsoft, Procter & Gamble, and Volcom were short-term gains (held for a year or less).
We're also assuming that KB Home and Panera Bread were long-term losses (realized after a year plus a day), and that RealNetworks, Sirius, and The Children's Place were short-term losses (realized in a year or less).
When you do the math, you see we're in a new situation: We have a net short-term gain and a net long-term loss. Uh-oh. Let's turn to Roy Lewis, our resident accountant, for further guidance:
If you have a short-term GAIN but a long-term LOSS, you NET OUT the gain and the loss. If the net result is a gain, you have short-term gain, and that result goes on the front of your tax return. However, if the net result is a LOSS, you have a long-term capital loss, and you can use as much as $3,000 of that loss to offset your other income, with the balance to be carried forward (but not back) to offset other capital gains in the future.
If you have a short-term LOSS and a long-term GAIN, you again net out the gain and the loss. If the net result is a gain, you have long-term gain, and that result goes through computations on Schedule D in order to compute the maximum long-term capital gains tax on it. However, if the net result is a LOSS, you have a short-term capital loss, and you can use up to $3,000 of that loss to offset your other income, with the balance to be carried forward (but not back) to offset other capital gains in the future.
Ready for the Mathanese? Here goes:
- Long-term: ($3,071 + $1,109) - ($1,926 + $3,329)
- Short-term: ($1,670 + $820 + $1,792) - ($1,247 + $800 + $1,448)
Your answer should be $1,075 in net long-term losses and $787 in net short-term gains. That's $288 in net long-term losses, all of which would be available as a deduction in your current tax year.
Questions? Submit them here, and we'll see you back here next week for more Mathanese.
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Amazon is a Stock Advisor selection. Microsoft is an Inside Value recommendation. Volcom is a two-time Motley Fool Hidden Gems pick.
Fool contributor Tim Beyers writes weekly about personal finance and investing basics. Have a Foolish money tip? Tell him. Tim didn't own shares in any of the companies mentioned in this article at the time of publication. Find his portfolio here and his latest blog commentary here. The Motley Fool's disclosure policy is lobbying its local school district for a course in beginning Mathanese.
