When it comes to investing in stocks and mutual funds, yes, it's true -- you can lose money. But there's a very real silver lining to that cloud: tax losses, which can make a big difference corporations and individuals alike. Being tax-smart in your investing doesn't just help you make the best of a bad situation; it can also be very profitable.
Think back a couple of years to the banking crisis, when big names such as Wachovia, Lehman Brothers, and Washington Mutual disappeared. At one point, Citigroup
The issue also came up when Liberty Capital
Shrink your taxes
When it comes to tax losses, we individual investors face very similar rules. Imagine that you're sitting on $10,000 of losses on a stock. If you have $5,000 in capital gains this year, you can offset them entirely with your losses if you sell. You might have owed $750 to $1,500 or more on those gains (depending on how long you held the shares), but now you'll owe zero. See? The loss hurt when it happened, but at least you're getting some benefit out of it.
Meanwhile, you still have $5,000 of losses left, having had only $5,000 in gains to offset. Well, you can now offset up to $3,000 of your taxable income with your losses! Voila -- another big savings, of up to $1,000 or so. And you're still not done. The remaining $2,000 in losses can be carried forward to the next tax year, where they can shrink your tax bill again.
With the money you save on your taxes, invest in some strong stocks. We'll introduce you to six in our free report: "6 Stocks David and Tom Gardner Think You Should Be Watching."
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Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. The Fool owns shares of Wells Fargo. Try any of our investing newsletter services free for 30 days. The Motley Fool is Fools writing for Fools.