Trying to predict the ups and downs of the stock market is very difficult.
When the US stock market took a dive in 2001, many eager investors waited for the best time to capitalize on the inevitable upswing that would come. Many who had invested unwisely saw, or are seeing, losses from foolish purchases made with poorly informed decisions.
Bad Buys With Great Expectations
Some investors had put high hopes into the Under Armor sportswear brand that went public in late, 2005, opening with a share price of $31. In less than two years, the stock soared (inflated, perhaps) to over $70 in August, 2007. This past March, Under Armor fell below $20, and is making an optimistic rise as it opened the month of June at $24.99.
While Under Armor seems very volatile, it is not the type of terrible buy that other investors have known. Under Armor, for example, is selling its product at increasing rates.
Other companies that went public have left investors looking more like gamblers, foolishly placing their money on the roulette wheel with odds of 35:1, just hoping to catch a big win.
One company that fits this bill is the communications service company, ICC Worldwide. ICC Worldwide took a sharp dive in the crash of 2001, trading for over $4 when it opened in January. By early 2005, it was selling for under 10 cents a share.
Those thinking that they had found the bottom and could capitalize on the market's upswing for this stock, potentially earning them millions from thousands, have yet to see this occur. In the past year, the company's stock has not traded for more than a penny but two times.
Recovering on Losses That Will Not Recover
Owners of stocks like ICC Worldwide that once held value and today do not, hate the idea of taking such a tremendous loss. However, those who find themselves near a lower tax bracket could rid themselves of the stock as a means of recouping some of their losses by lowering their tax burden.
The example used for the sake of this article will be of a fictional New York attorney, "Brian." While Brian was in law school in 2005, he wanted to capitalize on the stock market before it was too late. And so, he poured his life savings of $11,000 into ICC Worldwide when it was trading for 9.5 cents a share.
This year, Brian's 2005 investment is worth less than $1,000. On the upside, he is earning a substantial income of $62,500, placing him in the 28% tax bracket, resulting in his income tax burden to be $17,500.
If Brian believes that his shares will never recover, the best thing he can do is sell all or some of them. The result of a total sale will be a loss on investment of over $10,000, causing his income for the year to fall into the 25% income tax bracket as he would be allowed to deduct $3,000 in capital losses. This deduction will bring Brian's income down to $59,500, and his tax return next year will show his burden to be $14,875, granting him a return as a result of overpayment to government of $2,625.
While it is not desirable to lose money on any investment, investors should be wise to the ways of the tax code that play in their favor so as to keep more of their money for themselves. A partial recovery in this manner is better than no recovery at all.
This article was written with the guidance of Andrew J. Acovino, an accountant in New York, NY
Join the Conversation