With the fourth quarter fast approaching, it is a good time to evaluate your tax situation, as far as realized gains and losses, for the current year. This is normally the time of year that many investment advisers look for tax loss selling to help their clients’ tax situations.
If you have realized gains, you can offset them by selling stocks with a loss. However, there are some rules that apply.
Primarily, you should be careful of the wash sale rule, which prevents you from deducting a loss on the sale of a stock if you buy substantially similar securities within the wash sale period. If you sell a stock specifically for a tax loss, you cannot buy it back for 31 days (trade date + 30 days). If this same stock is purchased within this window, the sale no longer qualifies for a tax loss.
You should take notice of when you purchased the stock 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 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.
When you sell stocks for a loss, but still want to have exposure to the market, you could look at purchasing spiders (SPDRs) with the proceeds. SPDRs are unit investment trusts that hold a portfolio of common stocks. There are SPDRs for each sector, such as technology, health, energy, financial or utilities. A SPDR that represents the market sector of the stock sold for a tax loss could be purchased for the 31-day period, or a SPDR that represents the entire market (such as symbol SPY) could be purchased instead. After 31 days, you may sell the SPDR and buy back the stock. To learn more about SPDRs, you can go to www.amex.com and click on the section for ETFs.
Others may be on the flip side of this coin. Some could have realized losses rather than gains. Another aspect of year-end tax planning to consider is selling for gains, when there are substantial losses you want to offset. Remember, your losses carry forward, but you may only use $3,000 per year to offset your income. When you sell a stock 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 if 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. Always consult your tax adviser and/or investment manager to determine the strategy that will work best for you and your situation before you sell any stock for a gain or loss. For more information on this topic, contact Henssler Financial at at 770-429-9166 or experts@henssler.com.
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.
