Writing off a worthless stock

Founded in by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services. We've all made an investing mistake, and suffered the consequences.

Luckily, Uncle Sam makes taking stock losses a little easier by giving investors the opportunity to write off losses at tax time. Under the tax code, investors can write off any amount of losses against their gains.

Thus, it's possible that if you take a very large tax loss in one year, you'll be able to write off a portion of your losses for years and years to come. Maximizing your tax losses The tax code is written such that short- and long-term capital gains and losses must first offset losses of the same type.

Thus, short-term losses should offset short-term gains, and long-term losses would offset long-term gains. However, if your losses from one type exceed the gains of the same kind, you can apply the excess to another type of gain. Ideally, you'd want to match long-term losses with short-term gains. Short-term gains are taxed at the highest rate under the tax code, because short-term capital gains are treated as ordinary income and taxed at your marginal tax rate.

Financial advisors and accountants can help a lot here.

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Proper tax planning suggests you should seek to minimize or offset short-term capital gains whenever possible because short-term gains are taxed at the highest rate.

Of course, the best way to avoid all this trouble is to make investments in a tax-deferred account like a k or Individual Retirement Account IRA. In doing so, you'll be able to buy and sell freely without consideration for differences in taxation. Save the space in your tax-deferred accounts for investments that generate a lot of taxable gains or losses, and put the most passive investments in a taxable account.

Capital gains are the United States' only voluntary tax. You decide when to pay taxes by deciding when you sell an investment to lock in a gain. If you see any issues with this page, please email us at knowledgecenter fool.

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How to Write Off Stock Market Losses | eHow

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How Much to Write Off on Your Taxes With a Loss in Stocks Smart tax planning can save you a fortune on your tax bill. Here's how to maximize your capital gains and losses, and how much you can write off each year on your taxes. How to Invest in Stocks.

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