Michael Piershale, a financial advisor in Crystal Lake, Ill., recently had a woman come to his office for financial advice. She had sold stocks and realized a $20,000 profit, on which she had to pay 15 percent in capital gains tax.

Piershale, president of Piershale Financial Group, saw that she also had mutual funds that had lost $30,000. Except it was too late for her to sell the funds to write off the losses for that tax year.

“She could have sold the mutual funds for a loss and used the loss to offset the gains and eliminated the capital gains tax,” Piershale says. “She also could have used $3,000 in losses to offset her regular income, so she would not have had to pay the income tax on that amount. This would have meant a $3,750 drop in her income taxes for that year. She is not rich and that would have been a nice bonus for her.”

This is not an isolated occurrence. Piershale and other advisors say they see it happen over and over again—people hanging onto losing stocks far longer than they should.

In this case, the woman did not know about the possible tax offset. In other cases, people know they should sell their losers, but don't for emotional reasons, advisors say.

People may not want to sell, for example, because they are attached to stock a parent gave them or because they worked for the company.

Another Piershale client had a portfolio that was heavily invested in Enron stock, a company the client liked because he worked there and because the stock was making a steady climb.

“He loved his Enron stock,” Piershale says, “and he argued hard against selling it, but he finally gave in. I have never seen anyone as grateful as he was when Enron stock tanked and he had already sold his. Other clients go to their graves owning stocks they love but should have sold” to harvest the losses or to diversify.

“Some people are married to their stock and will not part with it no matter what the market does,” says Dan Neiman, portfolio manager for the Neiman Funds in Williamsville, N.Y. But that is often the wrong attitude to have when considering the impact of gains or losses on end-of-the-year tax calculations.

“The advisor should be looking for ways to utilize the losses to offset gains to save on taxes,” Neiman adds. “If there are more losses than can be used in one year, the losses can be carried over and used to offset gains in future years.” There is no limit on how long losses can be carried forward. Losses can also be taken against gains a spouse has earned.