Last week after visiting Financial Zenutopia, we sold the apples at a loss (wahh!), and left the paper gains in the oranges alone and didn't realize them.
So we're sitting here with a realized $20 loss in our apples, and we determined that we can use that to offset gains in any other fruit. But what if we don't have realized gains in any other fruit? What then?
Then we can use the loss to offset our income. As in, the money you get direct deposited every month. THAT income.
Let's say instead of a $20 loss in apples, it was a $20,000 loss instead. Does that mean you can deduct $20,000 against your income? Not exactly.
The bad news is you can only deduct UP TO $3,000 per year. The good news is the $17,000 left over after you do that doesn't go away. You keep it until you use it. (It's called a "capital loss carryover" in finance-ese if you want to Google it.)
So let's say the following year, you DO sell your oranges and realize a gain of $17,000. You can use the leftovers from the previous year's realized loss to offset that. Now you've used up all your capital loss carryover from the previous year.
Or maybe you don't sell anything and just use it to offset income every year at $3,000 a pop until it's all used up. That works too.
The catch is that you have to offset capital gains first, before you offset your income. Income tax rates are higher than capital gain tax rates, so it'd be better to offset income first, gains second. But Uncle Sam won't let you do that. So don't even try.
That's enough fruit for this week. So far we've learned about realized vs. unrealized capital gains and losses. And we learned what a capital loss carryover is.
Look at you speaking finance-ese! And you thought finance was hard!
Next week, we'll pull it all together to really stick it to our Uncle!