With the year winding down, you may be evaluating your portfolio, taking stock of your winners and losers for the year. Generally, you want to hang on to an investment as long as it meets your investment objectives. But, if an investment still meets your investment criteria and you’ve determined your stock holding is down because of normal fluctuations, all is not lost. You may want to consider recognizing your losses to offset your capital gains, thus improving your tax situation.
Tax loss selling is not only for stocks. Many investors who own high-yield bonds may be ignoring their losses because the bonds are still paying interest income regularly. You may be able to sell the bonds for a loss and immediately invest the proceeds into similar investments to maintain the annual income.
Long-term capital losses must be used to offset long-term capital gains before they can be used to offset short-term capital gains or ordinary income. Individual taxpayers may use up to $3,000 of losses in excess of total capital gains as a deduction against ordinary income. If your capital losses exceed this limit, you can carry forward to later years. Depending on your situation, you may find deferring gains and using capital losses to offset ordinary income may be more beneficial.
When selling for a loss, you need to be careful of the wash sale rule, which prevents you from deducting a loss on the sale of an asset if you buy the same or “substantially identical” asset within the wash sale period. This means if you sell a stock specifically for a tax loss, you cannot buy it back for 31 days (trade date plus 30 days); otherwise, the sale no longer qualifies for a tax loss.
You also need to take notice of when you purchased the asset you want to sell for a tax loss. You cannot sell a stock for a loss that you have purchased within the last 31 days. If you want to sell shares of a stock for a loss in one account, but purchased it within the last 31 days in another account in your name, you must sell your entire position in the stock. For the sale to qualify as a tax loss, you must sell all positions in the stock in any account under your control. In some instances, selling all positions in the same stock might defeat your purpose depending on the potential realized gain or loss in your other positions.
Another aspect of year-end tax planning to consider is selling for gains, when there are substantial losses you want to offset. When you sell an asset at a gain to offset your losses, you can immediately buy it back. Doing this increases the tax cost basis of the stock, which in turn, should lower any realized gain when the stock is eventually sold.
There are many items that play a part in determining one’s overall tax liability for a given year, not just gains or losses on stocks. Likewise, tax considerations should not be the deciding factor of whether to sell an investment. Always consult your tax consultant and your investment adviser before you sell any investment for a gain or loss.
If you need assistance determining the tax loss strategy that will work best for you and your situation, contact the experts at Henssler Financial:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
