Anyone brave enough to invest in stocks should be prepared to endure the rollercoaster ride that is the market. Stocks have always been volatile, particularly in recent years, and even when the market calms down on a whole, it’s possible to see individual stocks lose value month over month.
If you’re new to the stock market, you may be inclined to panic every time you see your portfolio take a dive, but remember: Even if it dips for a day, or a week, or a month, you don’t actually lose money until you sell. That’s because the market on a whole has the ability to rebound, and the same holds true for individual stocks.
On the other hand, there are scenarios in which a specific stock may appear to simply be doomed. Poor earnings, weak projections and news scandals can all spell trouble for an individual company’s stock, and if a loss is inevitable, it often pays to get out and sell while you can. The good news, however, is that you can make a loss work to your advantage.
Offset Capital Gains and Reduce Your Taxes
When you sell a stock at a price that’s higher than what you paid for it, your profit is known as a capital gain. And when you make money on a stock sale, not surprisingly, the government wants a piece of it. Short-term gains, which are gains on stocks held for less than a year plus one day, are taxed as ordinary income (meaning what your regular paycheck is at taxed at).
Long-term gains, which are gains on stocks held for longer than one year plus one day, are taxed at 15 percent if you fall into an average tax bracket. (Your individual rate could be higher or lower depending on your status.) If you sell a stock at a loss, you can offset it against a gain, thereby lowering your overall tax burden. In fact, if the amount you lose in a given year ends up outweighing the amount you’ve gained, you can claim an actual loss on your taxes and deduct up to $3,000 for it.
Pursue More Favorable Investments
Once you’ve sold at a loss, you can use the proceeds to invest in a more promising option, be it a different stock, bond or fund. Let’s say you sell a stock and lose $1,000. If you’re able to take the money you previously had in that stock, invest it elsewhere, and make $1,500, you’ll wind up ahead of the game. The only caveat is that you’ll need to avoid buying the same stock at a lower price, or a similar stock, during the 30-day period after you sell. This is called a “wash sale”, and unfortunately, the IRS won’t allow you to deduct your loss if you don’t wait till day 31.
Even when you lose money on a stock, there’s a silver lining. All it takes is a bit of strategic thinking and planning ahead.