Welcome back to another edition of "Speaking Mathanese," our Motley Fool series that tackles financial math myths and deconstructs 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 eschewing your investment income to examine the best way to handle your investment losses.
The myth
Remember last week's question?
What happens if your realized losses significantly outweigh your gains?
Now as it happens, the examples we've been using created net gains. But just for the sake of argument, let's pretend the losses on our losing positions were bigger:
|
Company |
Capital Gain |
|---|---|
|
Amazon |
$3,071.00 |
|
Boeing |
$1,109.00 |
|
Microsoft |
$670.00 |
|
Procter & Gamble |
$520.00 |
|
Volcom |
$1,792.00 |
|
TOTALS |
$7,162.00 |
|
Company |
Capital Loss |
|---|---|
|
KB Home |
$1,926.00 |
|
Panera Bread |
$3,329.00 |
|
RealNetworks |
$2,247.00 |
|
Sirius Satellite Radio |
$800.00 |
|
The Children's Place |
$4,448.00 |
|
TOTAL |
$12,750.00 |
By now, you should know that we don't add these two numbers together, right? Right?!?
The math
Sadly, there's very little that's simple when it comes to figuring your total investment losses. Here's Roy Lewis, our resident accountant, to explain why:
If both your short- and long-term "nets" are losses, you can use $3,000 of those losses as a deduction on your current tax return. The balance must be carried over (but NOT back) to offset any other future capital gains. I'll not bore you with the law as to how you determine whether the carryover loss is short term or long term. It wouldn't fit into one sentence anyway.
Remember the "short-term" and "long-term" distinctions? We use these terms to figure our capital gains tax liability. They're also important when it comes to tax-loss selling, as Roy says above.
So, let's keep to our example and assume 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).
Let's also assume 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).
Now, here's the Mathanese:
- Long-term: ($3,071 + $1,109) - ($1,926 + $3,329)
- Short-term: ($670 + $520 + $1,792) - ($2,247 + $800 + $4,448)
Your answer should be $1,075 in net long-term losses and $4,513 in net short-term losses. That's $5,588 in losses, $3,000 of which would be available as a deduction in your current tax year and $2,588 of which would be available for future tax bills.
What happens if you have short-term gains and long-term losses, or vice versa? Great question. Tune in next week for the answer, and submit your comments here in the meantime.
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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.
