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Taking the sting out of stock losses at tax-filing time

This post was revised and updated Friday, Dec. 21, 2018.


If you have money in the stock market, the recent series of down days is not making you very merry this holiday season.

But cheer up. Unlike your asset's value, all hope is not lost when it comes to taxes.

Those losing assets could pay off at filing time.

Stocks, bonds and mutual funds sold at a loss are capital losses. They can offset first any capital gains you might have, then up to $3,000 in excess capital loss can be used to reduce your ordinary income.

It takes a bit of work. You must count your long-term losses against your long-term gains. Those are assets you held for more than a year and which usually are taxed at a more favorable (read: lower) tax rate.

Then you do the same for short-term gains and losses, which are taxed at your ordinary tax rate. Under the Tax Cuts and Jobs Act rate changes, that could be anywhere from 10 percent to 37 percent.

And some lower-income taxpayers won't owe any taxes on capital gains, so the losses can offset their other earnings.

If you happen to have some capital gains, great! Check out which capital gains tax rate applies to those winning investments in my annual inflation adjustments post.

But if your investment crystal ball wasn't that good, read about making investment losses pay off at tax-filing time in this story, (by moi), as well as in William Perez's story for and Personal Finance Start-Up Blog's look at tax-loss harvesting.

Coping with market turmoil: Of course, when you're watching your nest egg tank, it's hard to see any silver lining, tax or otherwise.

Some investment pros offer advice talked with the Wall Street Journal on how to handle a volatile market. Among their tips (in case you don't have a subscription to read the story) are know your risk tolerance, consider corporate bonds and review your portfolio regularly to make sure your assets are balanced.

They also said don't panic.

I know that's easy for others to say when it's not their money that seems to be evaporating, but the truth is that if your holdings are appropriate for your financial situation, you should do OK when then market settles down. And it will. Eventually.

Patience in the face of stock swings is one financial tip I got from a discussion with Melody Kump of the Raymond James & Associates office here in Austin. Here are four others from Kump to help when facing market volatility.

Dollar signDon't put all your eggs in one basket. Diversifying your portfolio is a key way to handle market volatility. Because different sectors perform well under different market conditions, spreading your holdings across different types of assets such as stocks, bonds and cash equivalents can help prevent your holdings from taking a simultaneous hit when the market stumbles.

Dollar signConsider the forest, not the trees. Don't pay inordinate attention to the day-to-day moves of the stock market. Instead, focus on your long-term investing goals and overall portfolio.

Dollar signLook before you leap. When the market goes down, avoid temptation to leave it altogether for other, less volatile investments. The problem here is that such investments usually produce smaller returns. Stocks, despite the frustrations and fear they often cause, have historically outperformed stable investments over time. So if your investments are for long-term goals, your portfolio should weather periodic downturns just fine.

Dollar signFocus on the future. Watching the value of your stocks go down is never fun. But you might be able to pick up some similarly undervalued assets during a down cycle. Whether you're buying new stocks or additional shares of assets you already own, purchasing them at a lower price means you get more shares for your investment dollar. And when the asset rebounds, your gain will be greater.

I hope these tips help you make it through this rough investing patch now and also when it comes time to file your taxes next year.

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