ShmoopTube

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Finance a la shmoop what is tax loss selling okay it's been a great year

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overall you own a dozen stocks eleven of them are up nicely one however is a pig [Stocks appear]

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down big there's a week left in the year before the taxman closed with his books [Calendar of year appears]

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and gains and losses are calculated for tax purposes well of the 12 stocks you

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own one has gotten really pricey now trading at eighty times earnings and

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it's making you really nervous as you know that Dell if they don't have an [Company earnings graph appears]

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awesome earnings every quarter the stock will get cut in half or worse so you

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have a thousand shares of chap my hide a company that sells leather scented

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chapstick the stock is now at 80 bucks 80 grand worth which you bought three

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years ago for ten grand or ten bucks a share huge $70,000 gain nice work but

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you know that if you sell it since you live in a high tax blue state you'll pay [California highlighted blue]

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dearly about 35% tax on that gain or almost 25 grand in taxes leaving you

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just fifty five thousand dollars in cash after the sale well luckily you

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carefully watched this video and you know about tax law selling in this case [Tax loss selling video appears]

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well you have one big fat pig there to draw from ok another stock yeah a

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totally different outcome the pig you paid 50 grand for scratch-and-sniff [Scratch and Sniff diapers appear on the shelf]

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diapers when you bought your 2000 shares at 25 bucks each two years ago fifty

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grand and now after SSD shockingly missed [Actual earnings appear on company graph]

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three-quarters earnings estimates in a row while the stocks down to three bucks

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a share basically just the two dollars of cash per share the company holds plus

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$1.00 to value everything else the company has had to abandon its plans to [Person scratches sock]

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expand into scratch-and-sniff dress socks so well this is a big blow but for

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some reason you still believe in the company and want to buy the stock back

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someday you have way more than a month before this pig heals itself if it ever

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in fact does and if you bought it back sooner than a month after you sold it [Man scribbles bought back into calendar date]

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well then you wouldn't get credit for that tax law sale because you would have

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violated the wash sale rule which says that you can [Wash sale rule appears]

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sell a stock and then buy it back within 30 days claiming it as a loss with the

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IRS to then pay lower taxes so you've lost hope you're ready to take your

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losses in lumps and just sell it and that's usually a good thing to do here

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with tax loss selling you just sell your shares for 3 bucks each booking a loss

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of 22 dollars a share times 2,000 shares or 44 thousand dollars in losses [Tax loss selling equation appears]

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well that 44k directly offsets the gains that you realized with chap my

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hide so from the IRS perspective you won't pay taxes on the 70 grand of gains

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you made from the sale of CMH you'll subtract the 44 grand of pig losses from [Tax loss selling formula appears]

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that 70 grand of gains and pay long-term gain taxes on the realized gains of 70

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minus 44 or $26,000 your blue state 35% tax still applies but now it's on a much

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smaller base as you multiply 0.35 times 26,000 and you'll get about 9 grand in

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taxes much easier to digest than the 25 grand you are gonna have to pay

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otherwise so yeah that's what happens when you've got a pig that's a badly in [A pig rolling in the mud]

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need of a wash

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