How to minimize Capital Gains tax on Short Term and Long Term losses on stocks for this year and next

Edwards Finance > Capital Gains

Q. this year was pretty bad for me and im trying to reduce the pain by taking advantage of offsetting my (potential) gains with my losses- both short term and long term. I have realised $6,000 Short Term Losses (STL) and $9,000 Long Term Losses (LTL) this year when my Tech stocks tanked. I currently hold some other stocks which i can sell and make a profit (Short Term Gain of approx. $5,000) and some stock options that will only be vested in Jan 2003 when i get laid off (Short Term Gain of approx. $11,000 if the stock price stays around the current level!). Could anyone advise me on which selling strategy to take, bearing in mind: 1) STL realised this year = $6,000 2) LTL realised this year = $9,000 3) Potential STG this year (if i sell my stocks now) = $5,000 4) STG next year on exercising my stock options = $11,000 5) Next year i will be jobless and without income for quite a while i expect I was thinking of selling and exercising only next year, making a STG of $16,000 ($5,000 + $11,000). The STL and LTL of this year (total $15,000) would then be 'used' in deducting the maximum of $3,000 this year and carrying the remaining $12,000 loss to next year which would then be 'used' to deduct the expected $16,000 gain. Does this plan make sense?

A. A few comments: 1. Your opwn personal comfort with taking losses now rather than later, and with selling stuff now not later, are things I cannot judge. Your call here. 2. See Schedule D and also the Capital Loss Carryover Worksheet in the Form 1040 Schedule D Instructions to see how this really works. What happens is: Short term gains combine with ST Losses; LT gains combine w/ LT Losses Then the net ST and net LT gains.losses combine. If the result is a loss, and its more than $3000, fill out the Worksheet to see how much ST and LT loss to claim and how much of each to carryforeard to next year. 3. I recommend you go back to your options offer documents and see what they say about tax consequences if you have what you call a ST Gain on exercise of those options. I suspect you will discover you do not have "capital gain" which can be declared on schedule D but, instead, you will have ordinary income which gets added to your W-2 form and on which you pay FICA taxes. If I am correct none of the "ST gain" from exercise of the options will cancel any additional capital losses (you can claim a maximum of $3000 of net losses against any other ordinary income.)

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