Turning a Stock Market Loss Into a Financial Gain

For this example I’ll use a $6,000 mutual fund investment that has dropped in value by $1,000. The owner is uncomfortable with leaving the money in the account because he feels the value will continue to drop. Should he sell the share? Yes. Should he just accept the $1,000 loss? No.

Let’s assume the investor has other passive income that is earning money, he qualifies for an IRA and that he is in a 30% combined tax braket. Here’s what he might want to consider doing:

• Step 1. Sell the shares; original cost $6,000 for $5,000 resulting in a “loss” of $1,000.
• Step 2. Realize the $1,000 loss and write it off on his taxes, thereby saving $300 (30% tax bracket) in taxes, and by so doing reducing the real dollar loss from $1,000 to only $700.
• Step 3. Take the $5,000 from the sale of the shares and put it into his deductible IRA, thereby earning a $5,000 deduction and reducing his taxable income by that amount. This will save 30% of the deductable amount ($5,000) and result in a savings of $1,500 in taxes for the investor.

This $1,500 tax saving will cover the $700 net loss from the sale of the shares and still provide for an additional $800 positive effect. So at the end of our process, by using this simple tactic, we have converted a $1,000 loss into an $800 gain. (That’s over a 13% return on the original $6,000 amount.) Not bad huh?

This is just one of many ways an informed person can improve their financial position, even in the face of what appears to be very negative conditions. I hope it gives you some ideas that can help you personally. Keeping watching the blog for more tips, tools and tactics to improve your financial condition.