Selling losers now can ease the horror of tax time

— -- You open the package and scream with horror. It's … it's … tax forms from your brokerage accounts.

OK, tax bills aren't as horrible, as, say, finding your roommate in 37 neatly labeled pickle jars. But these days, having to spend extra money on taxes is dreadful, especially if you don't have to.

Fortunately, you can slash the taxes on your capital gains by taking an ax to your losing investments. This year, however, you'll have to tell your fund company exactly how to do away with your losers.

Nailing down the tax

Selling shares of stocks or mutual funds is a taxable event, provided you're not investing in a tax-deferred retirement or education account. The tax code offers special benefits to long-term gains and also gives you some relief from losses.

If you have owned your stock for more than a year and you sell it for a profit, you have a long-term capital gain. Max tax: 15%.

If you sell your winner and have held it for less than a year, you pay taxes on the gain at your maximum federal income tax rate, 35%. Single filers and those filing jointly need taxable income of more than $379,151 to be in the 35% tax bracket.

Let's say you owned 100 shares of Frankenstein Industries, a fictional enterprise that makes creatures. You bought your shares for $50 apiece, or $5,000, and sold them for $250 apiece, or $25,000, an unholy gain of $20,000.

If you had a short-term gain and you were in the 35% tax bracket, you'd have to saw off 35% of your profit — $7,000 — and feed it to the government. If your gain was long-term, you'd tear off 15% of your gain, or $3,000, and send it to the tax man. Clearly, patience pays off when selling shares: You save $4,000 by waiting to get the long-term capital gains rate.

Ripping the losers from your portfolio can also save you money:

•You can use your capital losses to offset any amount of gains.

•If you have capital losses left over, you can deduct $3,000 from your income — $1,500 if filing separately.

•If you still have leftover losses, you can carry them forward to the next tax year.

In the example above, you have a $20,000 taxable gain. But you also have a $30,000 loss from your sale of Nightmare, an imaginary evening school for jockeys.

You could use your $30,000 loss to completely eliminate your $20,000 gain. You could then deduct $3,000 from your income and carry forward $7,000 to the 2012 tax year. Be careful, though: If you repurchase the same or similar shares within 30 days, the IRS will deem your sale a wash sale and disallow the loss.

Back to real life

Now, those are examples from the wonderful world of Exampleland. Real life tends to be more complicated. First, the IRS taxes different gains at different rates. Long-term gains in gold bullion, for example, are taxed at the same rate as collectibles — 28%. If you own an exchange traded fund that invests in the metal itself, gains from that fund, too, are taxed at 28%. (ETFs are mutual funds that trade on the stock exchanges.)

And if you invest in an ETF that invests in futures — such as many currency and commodities funds — gains are taxed at a blended rate of 60% long-term gains and 40% short-term gains.