At the end of every year it makes sense to take a look at your taxable investment accounts and see if you have any big losses. If you find some, then it probably makes sense to sell that position (depending on how big the loss is, among other factors) to lock in the loss. Why?
By selling some securities at a loss, you can offset the gains you have on other items for the year. Do your losses exceed your gains? In that case you can deduct up to $3,000 against ordinary income. Still have more losses? You can hold on those and do the same thing next year or the year after until you offset the taxable gains in future years. In short, you can lower your taxable income now and in the future. Here is an example:
- I bought XYZ at $100,000. The position is now worth $80,000 and I sell XYZ for a $20,000 loss.
- If I have $10,000 in gains, I can use part of the $20,000 to offset that. I can then deduct $3,000 from ordinary income and save another $7,000 in losses for next year.
- To make it easy, let’s just say all income is taxed at 15%. Thus, while you lost $20,000 on the investment, you saved $3,000 in taxes, lowering your net loss to $17,000.
If you still like the investment, you can still buy it back later after the “Wash Sale Rule” is satisfied (i.e. you can’t purchase the same investment within 30 days or you can’t claim the loss). During that 30 day window you can purchase something similar to keep your allocation reasonable unchanged.
The counter argument is that if you buy the same investment back you will now have to pay gains on the appreciation so why tax loss sell in the first place. Still, I think the benefit goes to selling now:
- A dollar today is worth more than a dollar tomorrow.
- There is no guarantee the investment will go up.
Important -
Capital Advisors LTD and Capital Analysts does not provide Tax advice. Contact your tax advisor for review, implications, and applicability of any tax strategy to your situation. This tax information is provided for educational purposes only and is not a recommendation. Pursuant to recently-enacted U.S. Treasury Department Regulations, we are now required to advise you that, unless otherwise expressly indicated, any federal tax advice contained in this communication, including attachments and enclosures, is not intended or written to be used, and may not be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.
