Ring in 2003 With a Tax Loss

Investors still have time to lock in a profit or record a loss for 2002.

For tax purposes, the Internal Revenue Service considers the trade date of a transaction to be the effective date. So investors who sell a security as late as Tuesday (New Year’s Eve) would record any gain or loss in this tax year, even if the trade isn’t settled until 2003.

Stock trades normally take several days to settle, which is when the seller receives payment from the buyer.

U.S. stock markets will be open for full sessions (6:30 a.m. to 1 p.m. PST) through Tuesday.

However, investors who are planning to sell mutual fund shares should call their fund company and ask what’s required. Although many fund companies allow shares to be redeemed with a phone call, some require letters to execute a sale.

Fund trades normally are made at the closing price on the day the transaction is executed.

Whether selling individual stocks or mutual funds to take a loss, investors should be aware of the “wash sale” rule: The IRS will disallow any investment loss for tax purposes if you buy the same security, or a “substantially identical” one (that’s the IRS’ term), within 30 days of the sale.

Investors selling fund shares also should remember that there are four IRS-approved methods that can be used to figure the “cost basis” of the shares, for purposes of calculating your net gain or loss.

Fund giant Vanguard Group, in an advisory to investors, notes that “you should decide which method to use before you sell shares because certain methods require you to specify exactly which shares are to be sold.”

In addition, “Depending on which method you choose, you may not be able to switch to another method for future sales [of the same fund] without IRS permission,” the advisory says.

Because funds distribute all net realized capital gains to shareholders each year, investors who own funds in taxable accounts pay taxes annually on their profit. That means the net capital gain owed when an investor sells fund shares can be minimal.

Many fund companies offer help to investors in calculating their net capital gain or loss. Check with a fund representative or the company’s Web site.

Of course, realized gains or losses on stock or fund transactions within tax-deferred accounts (such as individual retirement accounts) don’t present a tax issue for investors. Money in those accounts isn’t taxed until it’s withdrawn, and realized losses in those accounts can’t be used to offset gains in other accounts.

The only exception can be for nondeductible IRA contributions: Once all money in your traditional IRAs has been withdrawn, you may have a loss for tax purposes if your total distributions have amounted to less than your total nondeductible contributions over the years, according to the IRS.

As with securities sales, taxpayers looking to make charitable contributions and take a deduction this year have until Tuesday to make the payments.

The IRS considers a contribution to be made when it is delivered to the charity, and mailing a check on Dec. 31 would constitute delivery in 2002, accountants say.