This is the time of year to think about “harvesting” (or selling) depreciated stocks to offset any stock gains and possibly reduce your 2017 tax bill. Just keep in mind that:
- Long-term capital losses offset long-term capital gains (generally taxed at 20%) before they offset short-term gains.
- Short-term capital losses offset short-term capital gains (taxed at your ordinary income tax rate) before they offset long-term gains.
- You may use up to $3,000 of total capital losses in excess of total capital gains as a deduction against ordinary income.
- Any remaining net losses can be carried forward to future years.
- Qualifying stocks must be sold by the last business day of the year, December 29.
Make tax-loss harvesting part of your year-round tax and investing strategies
The best way to maximize the value of tax-loss harvesting is to incorporate it into your year-round tax planning and investing strategy. Tax-loss harvesting and portfolio rebalancing are a natural fit. In addition to keeping your portfolio aligned with your goals, a once- or twice-a-year rebalancing provides an opportunity to reexamine lagging investments that could be candidates for tax-loss harvesting.
Also, take a look at how you are calculating the cost basis on your investments. Cost basis is simply the price you paid for a security, plus any brokerage costs or commissions. If you have acquired multiple lots of the same security over time, either through new purchases or dividend reinvestment, cost basis can be calculated either as a per-share average of all the purchases (the average-cost method) or by keeping track of the actual cost of each lot of shares (the actual-cost method). For tax-loss harvesting, the actual cost method has the advantage of enabling you to designate specific, higher-cost shares to sell, thus increasing the amount of the realized loss. Learn more about capital gains and cost basis.
Don’t undermine investment goals
If you choose to implement tax-loss harvesting, be sure to keep in mind that tax savings should not undermine your investing goals. Ultimately, a balanced strategy and frequent reevaluation to ensure that your investments are in line with your objectives are the smart approach.
Let us know if you have questions, we’d be happy to help.