Make Lemonade From Lemons - Page 2 of 2

Make Lemonade From Lemons

Suppose John Smith has $20,000 of capital losses in 2009 and no capital gains. He’d take a $3,000 deduction this year and carry over the other $17,000. Say John has $10,000 in net gains in 2010. He’d use his old losses as an offset, so those gains would be tax-free. He can deduct another $3,000 of old losses in 2010. After using up $13,000 of his $17,000 in losses in 2010 ($10,000 to offset gains and a $3,000 deduction), John will still have $4,000 of his old losses to use in future years.

Before you get too excited, listen to the catch: Say you sold Microsoft stock at a loss, but you now think Microsoft is a good buy. If you repurchase the software giant’s shares within 30 days of the sale, your capital loss won’t count. After taking a capital loss, therefore, you should wait at least 31 days before buying back the stock or fund you sold. If you don’t want to be out of the market that long,  you can reinvest right away as long as you don’t buy a fund that has virtually the same holdings as the one you sold at a loss. Employing these strategies should soothe some of the pain from 2008’s market losses for years to come.

This story originally appeared in the April 2009 issue of Black Enterprise magazine.