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Taxes & Investing

Taxes and investing are inextricably intertwined.  The more you know about tax laws and how they affect you, the more confident investor you will be. 

Understanding the Benefits of Tax-Loss Selling
Toward the end of each year you should take stock of your finances and review progress toward your goals. As you do so, it's important to keep in mind your tax situation. You may have some investments in your portfolio that have lost value since you purchased them, even if your portfolio in general is up. If that's the case, consider selling them before year end, and using the loss to offset gains from other investments or to lower your taxable income.

This investment strategy is known as tax loss selling, because you can lessen the tax consequences of a profitable investment year with high capital gains by selling positions that have not performed well. If you have substantial capital gains, you should evaluate your portfolio before the end of the year and consider selling shares to take a loss for tax purposes.

Here are some important points to take note of:

  • Only $3,000 of net losses ($1,500 if married filing separately) each year can be used to offset income other than capital gains, but capital losses over that cap can be used to offset gains in future years indefinitely.
  • The IRS requires that a trade gain or loss be reported for the year a trade occurs, so you can take profits and losses up until the end of the last trading day of the year and post them on the current year's return.
  • You can choose which lots of a stock you want to sell, and liquidate the shares you hold at the highest cost basis. Let's say you own 150 shares of a stock currently worth $50 a share. You bought shares on three different occasions, paying $40, $60 and $70 a share. You may choose to sell the lots that you bought at $60 and $70 a share and hold the $40 cost basis shares, if you still feel the stock is a good investment. In order to sell specific shares, you should know your cost basis and give your financial advisor written instructions on which lots to sell.
  • Be aware of the difference in your short-term and long-term capital gains. Gains on investments held less than one year are considered short-term, and are taxed at your ordinary income rate. Long-term gains, made on investments held over one year before selling, are taxed at a lower rate, which varies depending upon your income tax bracket.
  • If you sell a security that has recently been beaten up in the market but may still be a good long-term holding, be careful about adding it back to your portfolio. Under the wash-sale rules of the tax code, if you acquire the same or substantially similar security within the 61-day period beginning 30 days before and ending 30 days after you sell a security at a loss, you cannot claim a tax loss deduction.
  • Consider tax loss selling for your taxable accounts only. It doesn't make sense to sell at a loss to offset capital gains in an account that's already tax advantaged, like an IRA or 401(k).

Tax loss selling is an excellent strategy for reducing your tax burden and balancing capital gains, and should be a regular part of your annual financial review. Contact your financial advisor to get started.