A question about taxes/finances

[Aurel]

A few years ago, I made a bad investment on a stock that has kept going down, but I haven`t sold yet. The $2,500 I invested are worth about $200 now...

This year, I got relocated and received lots of benefits that are taxable as income. Thus, I am looking at a higher than usual tax bill, not sure by how much yet.

So, would it be a good idea to sell that bad stock and use the loss as a deduction to reduce my tax liability? I am pretty sure this stock is never coming back anyways.

[VincentVega]

Not a bad idea. The more info you have the better so figure out your total cap gains, w2 income.... before you made a decision, if you can get it together by market close. You wont see much a benefit, but everything counts.

For tax-reporting purposes, the short-term gains and losses (those made in one year or less) are first netted against each other for the tax year; then long-term gains and losses (those made in more than one year) are netted; and finally the remaining outcomes are combined together. So, a net short-term loss of $10,000 can be applied against a net long-term gain of $5,000 for a remaining short-term loss of $5,000 [-$10,000 + $5000 = -$5000]. In any given year, there is no limit on the amount of capital losses that can offset capital gains. However, only a maximum of $3,000 net loss can be deducted from ordinary income ($1,500 per person if married filing separately); any excess loss may be carried forward into future tax years. The carry-forward loss must maintain its definition as either a short- or long-term loss.

Read more: Selling Losing Securities For A Tax Advantage

[Dueller]

Not a tax attorney, but it would be a long term capital loss (held over 1 year). You'll have to complete a schedule D and apply loss to any cap gain.

I think there is a limit of $3,000 to apply a cap loss to any other type of income.

Consult someone who knows what they're talking about.