As we have been bumping along a rocky road in the stock market, many investors have gathered a bumper crop of losses in their taxable stock and mutual fund portfolios.
Although selling an investment with a loss can be difficult for some, savvy investors regularly use this "tax loss harvesting" technique to enhance their overall investment performance. Realized capital losses can be used to offset capital gains, with excess losses offsetting ordinary income up to $3,000. The balance of the loss can be carried forward to future years.
Investors who have seen their individual stocks go up in value can make the decision to sell one or more of their positions and realize capital gains, or to defer gains by continuing to hold their investments for sale at a later time. If they have a loss on any position, they can sell enough so that the capital loss can offset the capital gain, thereby owing no capital gains tax.
Many mutual fund investors will once again have a rude awakening this year.
The funds could be passing along capital gains distributions, while the fund itself might have declined in value. So those investors will be paying capital gains tax on an investment that has lost money. Ouch! Mutual fund owners can find out from the fund management company what the likely taxable gain will be on their shares and then take appropriate tax loss steps to minimize the tax impact before year end.
In calculating potential capital gains and losses, it is most important to determine the cost bases of your various investments. If you own individual securities, you may have made multiple purchases of the same stock over a period of time with varying costs. If you only sell a portion of that position, you must decide and declare which shares you are selling. Otherwise, the IRS will determine that you have sold the first shares you purchased using "first-in, first out" accounting, which could make a huge difference.
Calculating the cost basis of a mutual fund can be tricky. Usually, investors reinvest their fund distributions automatically, having paid tax annually on income or capital gains out of another pocket. These additions to the fund account increase the cost basis, thus any gain or loss taken should be determined on this adjusted cost basis. Oftentimes, investors forget this and end of paying more taxes than they should. Referring to your statements, in print or online will help you when making these calculations.
If you really wish to own the security you are selling for tax loss purposes, be careful of the "wash sale" rule in which the IRS disallows the loss if you purchase substantially the same fund or stock within 30 days either before or after the sale.
It might be better to temporarily buy a fund with a similar, but not exact, philosophy or a stock in the same industry.
Many investors are turning to tax-managed funds, index mutual funds, exchange-traded funds (ETFs) and professionally-managed individual accounts to simplify their tax and financial management and often improve investment results.
When making decisions for tax purposes, remember not to let the "tax tail" wag the "investment dog".
Please consult your professional advisors to learn how you might benefit.
Although selling an investment with a loss can be difficult for some, savvy investors regularly use this "tax loss harvesting" technique to enhance their overall investment performance. Realized capital losses can be used to offset capital gains, with excess losses offsetting ordinary income up to $3,000. The balance of the loss can be carried forward to future years.
Investors who have seen their individual stocks go up in value can make the decision to sell one or more of their positions and realize capital gains, or to defer gains by continuing to hold their investments for sale at a later time. If they have a loss on any position, they can sell enough so that the capital loss can offset the capital gain, thereby owing no capital gains tax.
Many mutual fund investors will once again have a rude awakening this year.
The funds could be passing along capital gains distributions, while the fund itself might have declined in value. So those investors will be paying capital gains tax on an investment that has lost money. Ouch! Mutual fund owners can find out from the fund management company what the likely taxable gain will be on their shares and then take appropriate tax loss steps to minimize the tax impact before year end.
In calculating potential capital gains and losses, it is most important to determine the cost bases of your various investments. If you own individual securities, you may have made multiple purchases of the same stock over a period of time with varying costs. If you only sell a portion of that position, you must decide and declare which shares you are selling. Otherwise, the IRS will determine that you have sold the first shares you purchased using "first-in, first out" accounting, which could make a huge difference.
Calculating the cost basis of a mutual fund can be tricky. Usually, investors reinvest their fund distributions automatically, having paid tax annually on income or capital gains out of another pocket. These additions to the fund account increase the cost basis, thus any gain or loss taken should be determined on this adjusted cost basis. Oftentimes, investors forget this and end of paying more taxes than they should. Referring to your statements, in print or online will help you when making these calculations.
If you really wish to own the security you are selling for tax loss purposes, be careful of the "wash sale" rule in which the IRS disallows the loss if you purchase substantially the same fund or stock within 30 days either before or after the sale.
It might be better to temporarily buy a fund with a similar, but not exact, philosophy or a stock in the same industry.
Many investors are turning to tax-managed funds, index mutual funds, exchange-traded funds (ETFs) and professionally-managed individual accounts to simplify their tax and financial management and often improve investment results.
When making decisions for tax purposes, remember not to let the "tax tail" wag the "investment dog".
Please consult your professional advisors to learn how you might benefit.