by Julian Block

All of his picks plummeted in value within a few days after he bought them, eventually by more than a disheartening 70 percent, and have since recovered only slightly. Victor is considering unloading the stocks and wants to know the tax consequences in the event he does decide to realize his paper losses.

Welcome to the club, Victor. You have lots of company, as attested by the e-mails I receive.

What might provide some consolation is the opportunity to indulge yourself in a soupcon of schadenfreude, which my Webster's Dictionary defines as enjoyment obtained from others' troubles. After all, your unrealized losses of more than two-thirds are still significantly less than the complete losses experienced by investors who perceived themselves as masters of market timing and spent big bucks for shares of dot-com ventures that subsequently went bust.

Department of full disclosure: Around the same time as Victor, I was inspired to move a portion of my retirement-plan money out of an IRA with a mutual fund that then seemed insufficiently go-go and into an IRA with a fund that emphasized high-tech companies, a maneuver that predictably prompted my wife to interminably remind me that her favorite play is "Lysistrata," as well as to dwell in detail on why a prolonged regimen of cold showers is a more-than-acceptable substitute for a particular pleasure of the flesh.

Fortunately, the Internal Revenue Code authorizes limited relief for Victor and others with losses from sales of individual shares of now-defunct high-techs or from sales of shares of mutual funds that moved their investors' dollars into those companies. However, no relief is available for folks like me with losses from sales of stocks or fund shares kept in IRAs, 401(k)s, and other kinds of tax-deferred retirement plans.

Victor can deduct capital losses, within limits, or fully offset them against capital gains on his other investments. There is a cap on his allowable deduction if he suffers a "net capital loss," IRS-speak for when total losses are greater than total gains. The cap is $3,000 for joint and single filers ($1,500 each for marrieds filing separately) on the net loss that can be offset each year against "ordinary income" - for example, salaries, pension payments and required minimum distributions from retirement plans.

What if his net loss for 2004 surpasses $3,000? Victor gets to carry forward any unused net loss over $3,000, whether short- or long-term, into 2005 and beyond, should that prove necessary.

To illustrate, Victor anticipates long-term losses of $80,000 and long-term gains of $30,000, resulting in a net long-term loss of $50,000 for 2004. He subtracts $3,000 of his loss from salaried income, leaving just $47,000 to carry forward into 2005. That year, he uses the remaining loss (unless offset by gains) to reduce salaried income by up to $3,000. His carry forward to 2006 of any unused loss is $44,000, with these numbers.

Victor needs to be mindful of the wash sale rules when he sells shares to establish a tax loss and wants to maintain a position in the same company -- no current deduction for the loss unless the repurchase takes place more than 30 days before or after the sale of the original stock. True, a hiatus of 30 days exposes him to an adverse move in the stock price; but in tax avoidance, as in life, there is almost never a free lunch.