Friday, 22 January 2010 15:48 Last Updated on Sunday, 31 January 2010 16:58
Investment losses are never pleasant, but you may be able to minimize the pain if you're able to use them to your advantage at tax time. Though tax considerations shouldn't be the primary factor in your investing decisions, taking them into account before December 31 could help your overall situation.
Harvesting losses involves selling losing positions to avoid being taxed on some or all of any capital gains realized from selling other securities at a profit. Losses over and above the amount of any capital gains can be used to offset up to $3,000 of ordinary income ($1,500 for a married person filing separately) or carried forward to offset capital gains or ordinary income in future years.
If you need to raise cash to meet other obligations, feel you should rebalance your portfolio, or simply want to move to investments you feel have better prospects in the future than the ones you now hold, harvesting losses can be an added incentive to take action. And harvesting losses now might prove useful in offsetting gains from any market rebound in future years.
If you have unrealized losses in a specific investment but are reluctant to sell because you believe it will bounce back eventually, there are a couple of strategies you could consider. You could double your holdings, then sell your original shares at a loss after 31 days. You'd end up with the same position, but would have captured the tax loss. (However, you'll need to be careful not to violate rules prohibiting what's called a "wash sale:" selling an investment at a loss and then repurchasing the same (or a substantially identical) investment before 31 days have passed.)
You also could sell a mutual fund at a loss, then purchase a different mutual fund or even an exchange-traded fund that invests in the same asset class, though again, you must take the wash sale rule into account. (Note: Before investing in a mutual fund, carefully consider its investment objectives, risks, expenses, and fees, which can be found in the prospectus available from the fund. Read the prospectus carefully before investing.)
Don't hesitate to get expert help if you think you might benefit from harvesting losses for tax purposes.
Content Prepared by Forefield Inc
