Sell Your Losses to Maximize your After-Tax Income

Only 4 days left for tax loss harvesting on any investments in non-retirement portfolios. We won’t know for certain whether tax rates are changing for capital gains with the new administration so if you want to make some changes this year, here are a few tips on what to look for:

1. If there are positions in your portfolio with considerable gains and it’s time to sell, you may be facing a hefty tax on those gains unless you could find some offsetting losses. First, identify any positions you want to sell. Not ones you think still have plenty of upside, but those you think have reached their target price. Calculate what the gains are on those positions and whether they are long-term (more than 1 year holding period) or short-term gains. Then, see if you have some positions with unrealized losses. If so, you could offset some of the gains from the sale of your winners by selling some of your losers.
2. Call your accountant, if you haven’t already, and ask her if you have any tax loss carryforwards from prior years. The IRS limits how much you could take in losses in any given year, but any losses in excess of that amount are carried over to the following year. If you do have some tax loss carryforwards, you could sell some of your winners and have the capital gains taxes be offset by some of those carryforwards.
3. If you need to reduce your tax liability this year and you have some investments with unrealized losses in your portfolio and no tax loss carryforwards, forget the capital gains, sell the losers. As mentioned in the previous tip, some limits apply. If you’re worried about notching a loss on one of your many positions, don’t be. This is called loss aversion in behavioral finance circles and it is one of the biggest mistakes made in investing. As Queen Elsa would say, ‘let it go’.

Some things to consider while you’re contemplating your next moves:

1. If you sell a position at a loss, you cannot buy the same position within 30 days. This is called the wash-sale rule and it is intended to prevent investors from creating a realized loss and then maintaining the position. In other words, if you sell to take the loss and get a tax benefit, you can’t buy it back for 30 days. That doesn’t mean you can’t buy another security, however. You can’t sell Apple at a loss and then buy it back within 30 days and still get the benefit of the loss. But you can sell the Vanguard Information Technology ETF (VGT) and buy the iShares Dow Jones Technology ETF (IYW). The exposures are slightly different but both have broad exposure to the Tech sector and this type of ‘swap’ wouldn’t violate the wash-sale rule.
2. Don’t sell a position if the only reason you’re selling is to create a tax benefit. That would be the equivalent of the tail wagging the dog. Only sell if it you no longer wish to hold the position…for whatever reason…then figure out how to do it in the most tax efficient manner.

I know it’s the holidays and you might already be in shut down mode, but don’t let these last few days go by if you can squeeze out a few extra after-tax dollars with some minor tweaks to your portfolio.