By Ashlee Ogrzewalla, CFP®, Vice President and Manager of Financial Planning & Marketing
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For investors in stocks and bonds, tax-loss harvesting can turn losers into partial winners. Tax-loss harvesting is a popular tax-minimization strategy under which investors sell investments declining in value to reduce losses on their tax returns. The end of the year is a great time to employ these tax-smart moves when evaluating individual positions in your portfolio.
Whether looking for a good time to rebalance taxable accounts or opportunities to offset capital gains, this strategy has many benefits.
The do’s and don’ts below will help maximize this strategy and minimize the amount of capital gains tax due.
- Consider a mutual fund investment time horizon for front-end load charges and contingent deferred sales charges (CDSC) or back-end load fees when tax-loss harvesting A and C class shares of mutual funds.
- Offset short-term gains (securities bought and sold within one year) with short-term losses. Identify securities with losses that were bought within the past year to consider selling to offset short-term capital gains.
- Consider using the cash from the sale of the security to help rebalance a portfolio and bring it back to the correct asset allocation.
- Wait 30 days before buying the same (or substantially identical) security to avoid the wash sale rule.
- Look for similar securities you could invest in while avoiding the wash sale rule.
- Remember that an unlimited amount of capital gains can offset capital losses. However, if there are more losses than gains, only $3,000 of capital losses can be realized in a given year. The remaining long-term capital losses must be carried forward and used to offset capital gains in future years.
- Talk to your financial advisor about which specific shares to sell to maximize your tax loss benefit.
- Buy the security that you just sold in one account in another account that you or an immediate family member own within 30 days – before or after the sale – triggering the wash sale rule.
- Repurchase a bond that shares a combination of the issuer, coupon interest rate, and maturity date. At least two of the three must be different to avoid the wash sale rule.
- Leave your dividends set to reinvest in the security you are selling – a dividend that hits the account after you’ve sold the security and reinvests in the security counts as repurchasing the same security within 30 days and triggers the wash sale rule. Make sure to disable this feature 30 days before and after selling mutual funds at a loss.
- Assume you are selling the lowest-priced shares purchased of the security. The IRS assumes securities are sold in the order of first-in-first-out (FIFO). In other words, the shares sold are those owned for the longest period of time. To avoid FIFO, the seller must identify the specific lot of shares to be sold at the time of sale.
- Tackle tax loss harvesting by yourself. Get the help of your financial advisor to ensure you are maximizing the strategy.
Your financial professional can work with you and your tax advisor to help determine whether tax loss harvesting can help you manage the tax impact of losses in your investment portfolio. When reviewing losses in a portfolio, this strategy can make the best of an otherwise non-lucrative situation.
IMPORTANT DISCLOSURES: The information provided is based on internal and external sources that are considered reliable; however, the accuracy of this information is not guaranteed. This piece is intended to provide accurate information regarding the subject matter discussed. It is made available with the understanding that Benjamin F. Edwards is not engaged in rendering legal, accounting or tax preparation services. Specific questions on taxes or legal matters as they relate to your individual situation should be directed to your tax or legal professional.