Using Market Declines to Your Advantage

 

Tax loss harvesting is the act of selling an investment that has lost value since its initial purchase to offset other investments that have realized gains from a sale. Losses can be harvested or captured during any time of the year but it is commonly done at the end of the year.

 

SHORT VS LONG-TERM 

When the general market or sector suffers a downturn you should consider reviewing your portfolio for any investment gains you have earned that will be taxed. Then, you can be strategic about how to keep the taxes on those gains to a minimum.  First, you’ll need to know whether the gains were earned in the short-term or the long-term. Short-term gains are investments that have been bought and sold within twelve months. Those short-term gains can only be offset with short-term losses. Long-term gains are those earned from investments held longer than twelve months, and similarly, they can only be offset by long-term losses. Short-term gains are taxed at ordinary income tax rates, which is usually higher than the longer-term capital gains tax rates.

 

FUTURE GAINS

Consider selling investments at a loss when the investment sector or asset class is no longer appropriate for your investment portfolio. You can also sell investments that are at a loss for a similar security in that same asset class or sector if you wish to keep the overall asset allocation. You can use the losses in future years if you don’t have any gains to offset or if your losses exceed your current year’s gains (there are limits here so check irs.gov).

 

PURCHASING A REPLACEMENT

When purchasing an investment to replace the old one, you have to be careful of a wash sale.  A wash sale occurs when you purchase the same or substantially identical security thirty days before or after the sale of a security. If that happens you cannot claim the loss of the sold security. A substantially identical security would be one like purchasing another ETF tracking the same exact market index.  If you aren’t sure what to replace the sold security with, consider a broad market index ETF for the meantime (as long as it isn’t the same one you sold).

 

Remember with tax loss harvesting you don’t want to lose sight of staying fully invested for the long-term.  I am not a proponent of market-timing but using a market downturn to your advantage can definitely have its rewards. Please talk to a tax advisor or financial advisor about this strategy before placing any trades in your portfolio.   

 

The blog post or newsletter makes general observations about markets, business, or financial trends and may provide advice about specific companies and specific investments. It does not give personal investment advice tailored to the needs, objectives, and circumstances of individual readers. Whether investment ideas and recommendations are suitable for individual readers depends substantially on the personal and financial situation of that reader, which KIT Today, as the publisher of the blog, makes no effort to investigate. KIT Today attempts to provide accurate content in its blog and newsletters to the extent such content is factual rather than analysis and opinion, but KIT Today relies primarily on information compiled or reported by third parties and does not generally attempt to independently verify or investigate such information. Moreover, some content and some of the assumptions, formulas, algorithms and other data that affect the content may be inaccurate, outdated, or otherwise flawed. KIT Today does not guarantee or take responsibility for the accuracy of such information. Please note that investing in stocks, other securities, and commodities is inherently risky, and you should rely on your personal financial and tax advisors. You should conduct your own due diligence in connection with any investment decision. Disclaimer of Liability: KIT Today disclaims any liability for investment decisions based upon recommendations, information, or opinions in its blog or newsletters. KIT Today is not soliciting you to execute any trade. Nothing contained in KIT Today’s newsletters is intended to be, nor shall it be construed as an offer to buy or sell securities or to give individual investment advice. The information in the blog and newsletter is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation, or which would subject KIT Today to any registration requirement within such jurisdiction or country. COPYRIGHT NOTICE: PRINT ONCE —- DO NOT FORWARD—-DO NOT COPY Current and past market commentaries are protected by U.S. and International copyright laws. All rights reserved. You must not copy, frame, modify, transmit, further distribute, or use the market commentaries, without the prior written consent. Any download from a secure website or email is meant for only the intended recipient of the transmission and may be a communication privileged by law. If you received this information in error, any use, dissemination, distribution, or copying of this email is similarly prohibited. Please notify us immediately of the error by return email analyst@kittoday.com. Although email and any attachments are believed to be free of any virus or other defect that might affect any computer system into which it is received and opened it is the responsibility of the recipient to ensure that it is virus free and no responsibility is accepted by KIT Today for any loss or damage arising in any way from its use.

Leave A Comment

Your email address will not be published.