Market Beat: It’s time again to talk about year-end tax selling
As the year comes to a close, many investors may be thinking about rebalancing their portfolios or taking some profits or losses for tax purposes.
If you have assets in a taxable account and are considering doing some buying or selling before the year ends, you should be aware of the potential tax consequences.
If you have a profit in a stock and want to sell it, you’ll incur a tax liability. If you’ve held the stock for more than one year, it will be taxed as a long-term capital gain. If you’d held it less than a year, the sell will be classified as a short-term capital gain.
In the event you decide to sell off a stock with a loss, the same rules apply; it will either be classified as a long-term capital loss or a short-term capital loss. Short-term gains are taxed at the taxpayers top marginal tax bracket.
Capital gains and losses offset each other, so by selling off some winners and losers during the year, they can cancel each other out.
So, if you had a gain of $2,000 in stock A and a loss of $2,000 in stock B and had held them both for over one year, if you were to sell them both, the net long-term capital gain would be zero.
The most you can write off in any one year is $3,000, so if you have a holding with a loss of over $3,000 and sell it, you can write off $3,000 this year, but have to carry forward the rest of the loss into future years.
The taxman also has a rule known as the “wash sale” rule. The wash sale rule states that if you sell a stock, you have to wait at least 31 days before you can re-purchase it or a substantially identical security, like an option on that stock.
So, if you want to take a profit, or a loss, on a stock this year for tax reasons, but want to re-establish a position in that stock with a new cost basis, you’ll have to wait at least 31 days.
Remember, taxes are just one consideration; if you’re going to do some repositioning, please consult your tax adviser for advice on your individual situation.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.