Now is time to sell stocks for a tax loss

December 12, 2004

I have 2,000 shares of Lucent Technologies. I paid about $75,000 to buy these shares at various times in 1998 and 1999. Today they're worth about $8,000. Should I sell them and take a tax loss? Or should I wait and see if Lucent can come back?

- Y.B., Allentown, Pa.

Here's a classic year-end dilemma. Sell now and take a tax loss for 2004 and perhaps beyond? Or hold on and wait for this busted balloon to soar back to the heavens?

Thousands this month will wrestle with such a choice. Yet they should not find this decision too difficult to make, said Robert Doll, chief investment officer at Merrill Lynch Investment Managers in New York.

Make this an easy decision. Sell now. Take the tax loss for 2004.

If you're still in love with Lucent (or another stock or mutual fund that's hopelessly out of the money), you can buy back the shares 31 days after you sell and comply with the "wash sale rule." If you're afraid Lucent will bounce upward immediately after you sell, you can buy shares immediately in a similar company in the same industry. And there is never a shortage of speculative stocks to replace those you've recently sold, Doll said.

"You have to let go. You have to accept the fact that you're never going to recoup the money you've lost on some investments," Doll said.

Yet, by selling your stake in Lucent before 2005 arrives, you can:

Declare a substantial capital loss for 2004.

Carry over your unused 2004 capital losses toward future years.

Offset possible capital gains (or mutual fund capital gains distributions) from stocks sold in 2004 at a profit.

If, for example, Lucent stock this month remains stuck at about $4 a share, and if you sell your full 2,000-share stake, you'd have about $67,000 in capital losses. (You arrive at this figure by taking your $75,000 cost basis, minus the $8,000 you might realize today by selling 2,000 shares of Lucent. Don't forget to subtract commissions from your final sales proceeds).

Tax laws prohibit you from claiming more than $3,000 in net capital losses in a given year. But you can carry over capital losses suffered in 2004 toward future years. Capital losses applied to future years can offset short-term or long-term capital gains.

Matthew Lubanko is a Your Money columnist. E-mail him at yourmoney@tribune.com.

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