Unlisted stocks are generally small companies that do not qualify for trading on an established exchange, such as the New York Stock Exchange or Nasdaq. Investors can generally access them on the Over the Counter Bulletin Board (OTCBB) or on what are called pink sheets. Holders of these stocks who sustain losses can sell them to offset capital gains elsewhere, and thus reduce their tax burden. Losses can also be carried forward, providing the means to lighten tax obligations in future years.
An investor who bought stock in a company for $25,000, and sells the shares in that unlisted company for $15,000, realizes a $10,000 loss. She can use that to offset a $5,000 gain in one of her other investments, plus deduct $3,000 ($1,500 if she is married but files a separate return) from her income. The remaining $2,000 loss can then be applied to gains in future years.
Many investors wait until the last few weeks of the year before deciding to take losses on underperforming stocks, which gives them a straightforward idea of gains they may need to offset. Given the volatility inherent in the markets, especially for thinly traded unlisted stocks, this strategy can end up costing more than simply selling when it becomes clear that those stocks are unlikely to recover. Selling stocks should be governed by sound investment principles, rather than an attempt to capture the last dollar of tax savings.
Investors who sell unlisted stocks for the tax loss cannot then buy back the same stock within 30 days and claim the loss. The Internal Revenue Service refers to this as a wash-sale rule, and does not permit deductions based on this type of trading activity. Stockholders who want to benefit from the tax loss, but who are optimistic on a particular industry, can buy a similar company immediately and thus benefit from a possible rebound. This strategy is relatively easy for major companies, such as Ford and General Motors, but unlisted stocks may not find ready buyers or sellers.
Investors who concentrate their stock holdings within a small handful of stocks risk major losses by not diversifying. Without offsetting gains elsewhere, a $60,000 loss would have to be carried over for 20 years to be written off. Another scenario is when shareholders have gains in one or two stocks, but are reluctant to sell because of the capital gains tax. Unlisted stocks can produce prodigious gains and equally spectacular losses, so a well-balanced portfolio with a disciplined tax strategy is essential to long-term success.
Robert Rimm graduated from the University of Pennsylvania and founded 88keys.com to provide education, writing and communications services for clients within the nonprofit, arts and education communities in the United States, Europe and Russia. His key interests include art and culture, social entrepreneurship, education, the environment and human rights. He is fluent in French and Russian, and is a widely published author.