We will be busy between now and the end of the year doing tax loss harvesting in our client’s taxable accounts. With such a broad market decline this past year it isn’t hard to find some losses – in some cases, many losses. There are a few tactics that can be used in tax loss selling. A security can be sold for the loss and then bought back in 30 days. If you want to take the loss, but think the market might have a rally in the next 30 days, you can double up on the stock and then sell the original lot in 30 days. That way you get the loss and you don’t miss out on the gain. However, there are many securities trading below what we believe to be their fair value, so reinvesting the proceeds immediately in something else is also prudent.
Mutual funds typically pass on capital gains to their shareholders in December. You may have a large loss in a mutual fund and also be burdened with capital gains. Since so many mutual funds have also had losses (almost all of them) we will be reviewing them for tax loss selling as well.
Capital gains can be offset by capital losses. If you do not have any capital gains a couple can deduct $3,000 of losses on Schedule D of their tax return, a single person can deduct $1,500. You can carry forward an unlimited amount of losses for use in later years. If there is an upside to a down market it’s that most of us should not be paying capital gains for 2008.
Barbara Gray, CFP