Duvall & Associates, Inc.
BUSINESS ADVISOR NEWSLETTER
 

The finer points of planning taxes for gains, losses

- by Alan Duvall 

Published in Dayton Daily News   September 24, 2006 

“Kick ‘em when they’re up, kick ‘em when they’re down.”  -Dirty Laundry by Don Henley, . 

Unless specifically excluded, gains (price minus cost) from all sales are taxed.  And if the asset is owned over a year prior to sale – a beneficial capital gains tax rate may be applicable. 

But losses from sales are not granted universal benefits to taxpayers.  In fact, losses from sales of personal assets are not  deductible at all.  

Losses from sales of capital (non-inventory) assets enjoy limited deductibility, a fact which gives rise to a “veritable plethora” of tax maneuvers to salvage at least some booty from the wreckage.   

Typically, each year capital losses are only deductible to the extent they offset other capital gains, plus an additional $3,000.  Regular corporations do not even receive the extra $3,000. 

To illustrate, assume an individual sells stock at a $163,000 loss.  The same year another stock sale generates a $10,000 gain.  The taxpayer can use losses to offset the $10,000 gain and deducts the extra $3,000 - a $3,000 net loss for the year.  Unused losses may be carried forward indefinitely to be deducted in future years. 

If no further gains are realized in the future, the individual will deduct $3,000 per year for the next 50 years.  Live only 30 years?  Remaining unused losses are buried with the deceased. 

The dismal prospect of future benefit from current year capital losses generates a scramble for imaginative tax planning.  Obviously the search begins with the exploration for capital gains to offset the losses.  Careful timing of gain and loss transactions can certainly ease the pain. 

Insufficient gains?  Individuals may be able to deduct up to $50,000 ($100,000 if married) losses on small business stock without regard to capital loss limitations. 

Other small business investors may traverse a more perilous journey to argue for itemize deductible theft losses.  Success is dependent upon proving a relationship and reliance upon business managers who made fraudulent misrepresentations which induced the purchase decision.  Such an argument is even more difficult to sustain for open market investors, despite the era of Enron. 

Sketchier still is a tactic of simply abandoning investments to claim an ordinary loss exception to capital loss rules.  But such is the path taken by desperate losers of the investment world. 

“Kick ‘em all around.”

Alan Duvall is a certified public accountant in Dayton.  Contact him at Alan@Duvallcpa.com.