Harvesting your Tax Losses

by

It’s close to the years end and the right time to review your overall portfolio. It’s also a good idea to start thinking about the tax implications that your portfolio will have as we get closer to the tax deadlines. The market had been hitting all-time highs, which means that you may have some gains in your portfolio. It may also be a good time to see if you can start harvesting your tax losses along the way to offset those gains.

Tax Loss Harvesting

If you sold some securities this year with a gain, you might have a tax liability ahead. If you also have some securities that aren’t performing particularly well and are currently below your purchase price you might be able to harvest them for a loss. This strategy may be applicable in your situation if you decide to sell the securities at a loss to offset the securities you sold at a gain.

Review a few points before you harvest your losses. First, get professional advice and second, don’t fall victim to the wash sale rule! The IRS rule created for you to avoid doing what this strategy intends you to do. If you follow the rules, however, it’s legal and can save you bundles in taxes.

Wash Sale Rule

The wash sale rule is outlined and can be found in the IRS publication 550. The general points are that a stock sold at a loss and instantly repurchased will eliminate the realized loss. You’ll have to wait 30 days for it to qualify. If you don’t wait for the minimum 30 days, the wash sale rules apply, and you can’t use the losses to offset your gains.

It doesn’t necessarily mean you can’t invest for 30 days; you just can’t buy an identical security. The IRS publication states that within this window you can’t, “Buy substantially identical stock or security,” but like many things with the IRS, it will be interpreted differently for various securities and transactions. So, again, get professional advice before making this decision.

Opportunity Cost

A critical point that surrounds tax harvesting is going to be the opportunity cost. Selling a security only to realize the loss to offset your gains may be near-sighted. If the security rises within the 30 days that you don’t own it, you may lose the opportunity for gains. It’s also probably the reason you purchased the security in the first place. So make an informed decision that will benefit you for the long haul.

 

Sign Up Today for Instant Access

To Our Financial Planning Newsletter

  • News, Updates & Alerts
  • Fresh Ideas & Perspectives
  • Written in Plain English

BONUS


Key Investment Strategies Hidden in Plain Sight

3

Send this to a friend