Harvest Your Losses in November
October is generally the worst month of the year for investor. Stocks that are down often get punished even more, because many mutual funds have a fiscal year that ends in October, and they are ditching losers before they close their books.
But then November comes along, and things look great again. November is historically the best month of the year in the market. That makes it a great time to sell some of your losers on the bounce, to get in some year-end tax-loss harvesting.
Although you have until the end of the year to do this, I remind investors to start thinking about taxes with enough time left in the year that they can develop a plan and execute it.
Taking Some Profits
This year’s big sector winner is technology. Many tech companies have scored huge gains year-to-date. Therefore, it may be a prudent idea to take some profits on your technology holdings. The downside that if you hold such companies outside of a retirement account, you will generate a tax liability.
A short-term capital gain occurs if you held an asset for less for one year before selling it. Short-term capital gains are subject to taxation as ordinary income.
For assets held longer than one year, you will benefit from a more attractive long-term capital gains tax rate. The long-term capital gains tax rates are 0%, 15%, or 20% depending on your taxable income.
Accordingly, one consideration as we head into the end of the year is how long you have held a security. By paying attention to the timing of your sale, you can save yourself quite a lot on your tax bill.
But you can save even more on your tax bill by offsetting those gains with any losses in your portfolio. This is the time of year that you should look over your portfolio and make those kinds of strategic decisions.
This year, most sectors underperformed the S&P 500. About half of all sectors are in negative territory for the year. Utilities have been hit especially hard.
But, you can take advantage of a company like the world’s largest publicly traded utility NextEra (NYSE: NEE) — down 34% year-to-date (YTD) — to offset the tax implications of your 50% gain in Apple (NSDQ: AAPL). This strategy is called tax-loss harvesting and it can lower your taxable gains.
However, that also means that companies that are down for the year can face increased selling pressure as the year comes to a close. That’s why I prefer to do my tax-loss harvesting in November.
If you sell off your losers and harvest those losses, you can offset dollar-for-dollar your gains. This strategy is especially appealing to limit the impact of short-term capital gains.
You can even sell a losing company that you still like. Just be careful about the “wash sale” rule in the tax code. This rule prohibits a taxpayer from claiming a loss on the sale of a security and then buying a “substantially identical” security within 30 days of the sale.
What does “substantially identical” mean? It obviously covers selling and buying back common shares in the same company within 30 days. However, an S&P 500 index fund run by one company may be deemed by the IRS to be substantially identical to an S&P 500 index fund run by another company.
I can’t sell shares of NextEra, claim a loss on the sale, and then buy back shares of NextEra within 30 days. But I could replace my NextEra with shares of another major utility like Eversource Energy (NYSE: ES), which is itself down 36% for the year. That would be a way to lock in losses for tax purposes, while maintaining the same sector exposure. The utility sector was the biggest laggard in the S&P 500 this year, but it will bounce back. If you do sell a loser from your portfolio, I recommend you maintain the sector exposure unless you need to rebalance.
I’d rather be feasting on gains than harvesting losses, but smart moves now can save you big time later. Just don’t wait until the last minute when all the other procrastinators are trying to do the same. Get ahead of the herd and your future self will thank you!
Editor’s Note: Hello, John Persinos here. I’m editorial director of Investing Daily. Among the publications that I edit is our premium trading service Utility Forecaster. My colleague Robert Rapier is the chief investment strategist.
As you position your portfolio for next year, turn to utilities stocks. The utilities sector has gotten clobbered lately by rising interest rates, but it’s poised to rebound when the Federal Reserve pivots in 2024. That means value plays are ready for the picking.
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