Time For Year-End Tax-Loss Harvesting

If you invested in Apple (NSDQ: AAPL), Amazon (NSDQ: AMZN), or Tesla (NSDQ: TSLA) this year, you are probably sitting on a large amount of capital appreciation. Should you decide to sell any of thoss positions before year-end, you will face short- or long-term capital gains.

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 start to look over your portfolio and make those kinds of strategic decisions.

Tax-Loss Harvesting

Several sectors have been battered this year. You can take advantage of those companies that are in the red to offset those that are in the black. This strategy is called tax-loss harvesting and it can lower your taxable gains. But it also means that companies that are down for the year can face increased selling pressure in December. That’s why I prefer to do my tax-loss harvesting in late November.

You can even sell a company that you still like, but 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 a hard-hit oil company like ExxonMobil (NYSE: XOM), claim a loss on the sale, and then buy back shares of ExxonMobil within 30 days. But I could replace my ExxonMobil with shares of Chevron (NYSE: CVX). That would be a way to lock in losses for tax purposes, while maintaining the same sector exposure.

I would certainly rather be looking at gains across my portfolio, instead of locking in losses to offset gains. But investors must use every tool at their disposal to maximize returns. In this case that may mean taking a loss to minimize the check I have to write to Uncle Sam.

But you may not want to wait until December to do it, because that’s when lots of other investors will be employing the same strategy.

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