NEW YORK STATE — Tax year 2008 is drawing to an end and with the downturn in the stock market and an uncertain economy, many investors are unloading their bad stocks by the Dec. 31 deadline to claim a loss on their tax returns.

“People do try to sell bad stocks,” IRS spokesman Kevin McKeon said. “In terms of their portfolio … if they can claim a loss, it might be to their tax advantage to do so.”

McKeon suggests that New York taxpayers review the recent tax changes and recently reinstated tax deductions as part of the year-end tax planning. “Some tax breaks and a review of your current tax situation may result in a bigger refund or less taxes to be paid come tax time,” he said.

Local financial advisors say that taxpayers hoping to claim a loss should know all the rules and be aware of the pros and cons of selling stocks prior to the Dec. 31 deadline.

“You can trade your security in the calendar year, but make sure it settles in the calendar year to take advantage of the tax laws in that calendar year,” said Joseph Ventura, president and manager of William Tell Financial Services with Invest Financial in Latham.

Many people think that if they trade stocks or mutual funds it will count for this year’s tax deduction, but Ventura said some investments, such as mutual funds, don’t clear for three days. If the sale isn’t finalized by the end of the year, it can’t be used as a tax deduction for 2008. Certain securities clear quicker and an individual stock may clear immediately, he said.

The IRS allows an individual to claim up to $3,000 per year in net loss. If, for example, Joe Smith had an investment of $10,000 and it’s now worth $7,000 and he held onto it, he couldn’t write it off. But if he sells it and it clears, he can write off the loss for 2008.

Another strategy is to replace the losing mutual funds or stocks with similarly intentioned or positioned investments.

For example, one might sell their losing Exxon stock or small cap foreign investment mutual fund and replace it with Chevron or a competing small cap foreign investment mutual fund.

That way, an investor can immediately reinvest at the reduced price, maintain the portfolio allocation and claim the loss on the tax return.

But beware: The federal government’s “wash sale” rules prevent you from claiming a loss on the sale of a stock if you buy substantially identical shares 30 days before or after the transaction. The “wash sale” rules are moot if you sell stock prior to the end of the year and stay out of the stock for the 30 days before or after the transaction.

A risk in selling off an investment now and rebuying the shares after 30 days is the potential that the shares value could increase.

“If the shares increase, you will buy less shares when you get back in,” said Ventura.

And, only non-retirement accounts can be sold off for tax purposes.

Ventura said that an exchange for one mutual fund to another — for instance a blue chip fund exchanged into another fund (i.e. international fund), is still considered a sale for tax purposes.

Meanwhile, for anyone who is self-employed and wants to establish his first self-employed pension plan (which allows the individual to contribute more than an IRA would) it must be set up in this calender year for it to be a tax advantage. The plan must also be funded prior to the first of the year. (With an IRA you can make tax-deductible contributions until April 15).

Most people who invest in the stock market are only looking for a supplemental income, according to Ventura, who suggests consulting with a tax advisor or financial planner.

It’s still too early to say if New York taxpayer are bailing on bad stocks to claim a loss.

“We won’t know anything until returns are filed and statistics can be calculated. It doesn’t get reported till later,” said Tom Bergen, spokesman at the state Department of Taxation and Finance.