want to have to pay taxes on a fund that isn’t doing very well. Cur- rently, the mutual fund is trading at $18 per share so you sell your 1000 shares. That’s $1.50 per share less than your average cost per share, resulting in a capital loss of about $1500. That loss can be used to offset any capital gain you have to claim on your taxes, thus reduc- ing your tax burden.
Now, if you hadn’t had your dividends and capital gains rein- vested, and you had been taking them as cash distributions since you had purchased the fund, assuming that everything else remained the same, your resulting capital loss would be $4000.
Shares owned Purchase price paid Average cost per share Price shares sold for Capital loss (approx.)
= 1,000 = $22/share = $20.50/share = $18/share = $1500
Shares owned Purchase price paid Price shares sold for Capital loss
= 1,000 = $22/share = $18/share = $4,000
After producing a capital loss, the money is then reinvested into another fund. Generally, I try to pick another fund that has a similar feel to it (i.e., growth to growth and value to value). However, you need to be careful about what the money is reinvested in. If the IRS feels that the second fund is too similar to the first fund, and you rein- vested the money in the second fund within 30 days of selling the first, they will disallow the capital loss. Therefore, you need to pick another equity that is different than the one that was sold. This law is to prohibit investors from selling equities low and then repurchasing the same equities just so they can claim a loss on their taxes. The law, though, is written so that there is a broader interpretation of what the similar equities are, so be careful. If you manage your money yourself and wish to claim a loss in this manner, it would be a good idea to con- sult a professional so that you don’t inadvertently disallow your loss.
One of my clients has found that by producing a capital loss, we greatly benefit his tax situation. What I have done for him is sell one