The best part about investing is making a profit. For some investors, this is the result of having made a few mistakes along the way.
When investors earn money they are subject to capital gains taxes, which are usually 15%. While this is a low rate of taxation relative to many people's income tax rates, it is still worth counter-balancing if past investments that are sure losers are available to be sold.
What are Bad Investments?
A bad investment is one where an entity was overpaid for. While a good investor wants to make money when he buys for a great price, that is not the situation with this kind of investment.
For example, if a person sees that the stock in OMG Corp. is skyrocketing from a penny a share to a dollar, and buys 10,000 shares at a dollar only for it to sink back down to a penny, his $10,000 investment is only worth $100.
If there was no reason that the stock should have jumped up outside of unreasonable investor activity, then it was a bad investment for those who did not sell at the stock's height.
Selling Toxic Assets in the Face of Investment Gains
While the previous investment loss would stop many from ever investing again, it would encourage some to learn more about investing. After all, someone made money on the deal, right? Meanwhile, it costs nothing to hold onto the worthless stock, but there can be some gain later on.
If one was to make a $10,000 gain on a future investment in OK Ltd., he or she would be subject to paying $1,500 in taxes. However, by selling the worthless OMG stock, the gain would be offset by the claim of the $9,900 loss.
Some might argue that this is a means of the rich scamming the system, but is it?
Is it Wrong to Avoid Capital Gains Taxes?
The idea that this process of offsetting gains taxes can be confusing for some. After all, it is a means of not paying taxes, but it is one where losses are balanced against gains.
This investor is not gaining an extra $1,500 in doing this. Rather, he is offsetting a tremendous loss by lowering it to $8,400. No investor would trade $9,900 in for a $1,500 tax break, but that is all one could do in this case to reduce the pain of the past loss.
Investing is a long-term process where those who are smart learn as much as they can so that they can make the gains they need in order to retire comfortably later while living well today. For the losses that come, some can still serve some value, even if it is only as a fraction of their cost.
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