NCPA - National Center for Policy Analysis

Taxes And Stocks

December 27, 2000

Since the stock market peaked in March 2000, investors have experienced large capital losses. For ordinary investors, the relevant consideration is whether to realize enough of their losses to get some benefit on their taxes.

  • Capital losses are fully deductible against gains, and up to $3,000 of losses can also be deducted from ordinary income.
  • This last can save an investor in the 28 percent tax bracket $840 on his tax return in April.
  • However, mutual fund investors may find that fund managers sold stock for a profit earlier in the year and that such profits give them taxable gains, even though they themselves did not sell any mutual fund shares.

The only way they can avoid a tax liability under these circumstances is by selling their mutual funds, realizing their losses and using them to offset the gains that were distributed earlier in the year. This tax-driven selling was widely blamed for the drop in the stock market in late March and early April of this year.

A similar problem confronts those with stock options from their employers. When the market was high earlier in the year, many exercised their options, creating paper capital gains on which they must pay the Alternative Minimum Tax (AMT). And like the mutual fund investors, the only way they can cancel this liability is by selling their stock.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, December 27, 2000.


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