Re: long-term loss

From: Rich Carreiro <rlcarr@animato.pn.com>
Subject: Re: long-term loss
Date: Mon, 15 Jun 1998 17:13:54 -0400

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>hi: i have a question regarding long-term capital losses. do i have to
>use LT losses to offset LT gains or can i use them to offset short term
>gains? the reason is obvious, my LT gains are taxed at 20% and ST gains
>at 28% and i would rather offset 28% gains than 20% gains. 

Just follow Schedule D (as maddening as that may be :-).

The first clear bit is that short-term losses first offset short-term
gains.  The second clear bit is that aggregate long-term losses first
offset aggregate long-term gains.  These are clear from the structure
of Sched D.  Short-term gains and losses are netted to line 7.  Total
long-term gains (i.e. "20% gains" and "28% gains" taken together) and
losses are netted to line 16.  "28%" gains and losses are netted to
line 15.  The net ST gain(loss) and net total LT gain(loss) are then
netted to line 17.

So the answer to your question is yes, you must use LT losses to first
offset LT gains (but you also first use ST loss to offset ST gain),
and this is fairly clear from the form.

What is less clear is how "20%" gains and losses and "28%" gains and
losses (remember, these are both long-term) ultimately net against
each other.  A quick skim of the evilness that is Sched D, Part IV
does not make this immediately clear to me.  Really following the
calculations through should bring out the answer, though.  I do recall
reading that Congress was generous enough to let both "20%" and "28%"
long-term losses first offset "28%" long-term gains and then offset
"20%" long-term gains instead of having each offset their own kind
first or even worse, having them both offset "20%" gains first.

>also, does the same apply to 'worthless stock'? i have some stock for a

Yes.  The type of loss on 'worthless stock' is, like losses in
general, is determined by your holding period in the stock.  However,
remember that ceasing to trade on an exchange or going bankrupt does
not at all necessarily render the stock worthless in the eyes of the
IRS.  The stock has to be totally worthless to take the loss without
selling it.  Because of this difficulty, many brokers will, as a
service to their customers, buy such stock from their customers for a
token sum, thus providing the necessary arm's-length sale to take the
loss even though the company isn't worthless in the eyes of the IRS.

Rich Carreiro
rlcarr@animato.pn.com
P5-100/RedHat Linux 4.1



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