Your Taxes: How to deal with losses on securities

An understanding of Israeli tax rules for dealing with losses realized from securities in 2008 is pertinent in light of the current financial crisis.

taxes good 88 (photo credit: )
taxes good 88
(photo credit: )
An understanding of Israeli tax rules for dealing with losses realized from securities in 2008 is pertinent in light of the financial crisis gripping world financial markets. I won't attempt to say what is the best course of action from the economic viewpoint and will limit the discussion to passive investments, not active trading in securities. Offsetting a loss Companies and individuals can offset losses generated in 2008 against real (inflation-adjusted) capital gains. This applies regardless of whether the loss and the gain were generated from assets located in Israel or abroad. Assets include securities publicly traded abroad and in Israel. Only realized gains and losses can be offset, not unrealized paper gains and losses. In addition, you can generally offset a capital loss derived in the year from various securities against dividend or interest income from the same securities. You can also offset a capital loss derived in the year against dividends and interest from other publicly traded and private securities, including deemed dividends from a controlled foreign corporation (CFC), which is often an offshore company, and dividends from approved enterprises and privileged enterprises, so long as the Israeli tax rate on the dividends and interest does not exceed 25 percent. Here's a tip. Suppose you foresee a capital loss this year on your holdings of publicly traded securities in Israel or abroad, and you control a private company. You should check whether it is worth taking a dividend from your company and realizing the capital loss - before the end of this year - with a view to offsetting the capital loss against the dividend. Special conditions There are a few conditions to bear in mind. First, if you generate capital losses upon the sale of assets located abroad, you must first offset the loss against capital gains from the sale of other assets located abroad, then capital gains from assets located in Israel. Second, individuals (as opposed to companies) cannot offset current-year capital losses against interest from other securities if the interest would be taxed at marginal rates (up to 47% plus national insurance in applicable cases), as these rates exceed 25%. This affects the following cases: (1) where borrowing costs are deducted from interest income, (2) interest income from a company in which the recipient is at least a 10% material shareholder, (3) interest income that is business income, (4) where special relations exist between the interest payor and recipient, such as supplier-customer, employer-employee, related parties, etc). Third, capital losses brought forward from years before 2008 cannot be offset against income or dividend income received in 2008 onwards. As always, consult experienced legal, tax and financial advisers in each country at an early stage in specific cases. Leon Harris is an international tax specialist.