A few weeks back, I kicked off the Intelligent Investor Series as part of my weekly commentaries. Th...
Trading Lesson: Understanding Tax Harvesting
11/24/2017 6:00 am EST
Tax harvesting is the process by which investors sell losers to offset the realized gains they’ve incurred during the year, explains dividend expert Chuck Carlson, editor of DRIP Investor.
Given the market’s strength this year, I suspect investors will be seeing outsized realized gains, whether from selling winning individual stocks or receiving capital-gains distributions from mutual funds.
By selling losing stocks, you can use the realized losses to offset some or all of your realized gains, thus reducing or eliminating your capital-gains tax bill. If you decide to tax harvest, be aware of these issues:
➤ You are not likely to be the only one tax harvesting in a particular losing stock. It is not unusual for stocks that have been lousy performers to see big selling pressure between now and the end of the year.
However, it is also not unusual for stocks that see big tax-selling pressure to rebound in 2018 as the tax-selling pressure subsides.
The upshot is that you may fetch a higher price by waiting to sell in early 2018. To be sure, if you are trying to reduce your tax bill for 2017, you need to sell in 2017. But you should realize that it is possible that the stock you sell could trade higher mere weeks later.
➤ If you sell with the idea of buying back the same stock, know the rules governing “wash sales.” One strategy tax harvesters take is to sell the stock to book the loss, then buy the stock back to maintain a position in the shares.
There are no hurdles to selling and buying back the same stock, but there are timing considerations. “Wash-sale” rules apply to the timing of selling stocks with losses and buying back the securities.
Basically, if you sell a security at a loss and buy the same or “substantially identical” security within 30 calendar days before or after the sale, the loss is typically disallowed for current income tax purposes. You can’t get around wash-sale rules by selling the security in one account and buying back the security within 30 calendar days in another account.
And you can’t get around the rules by buying the stock today and selling “old” shares of the same stock tomorrow. Again, you cannot buy the security within 30 days before or after the sale. Bottom line: If you sell a stock with a loss for tax-harvesting purposes, but you still want to own the stock, wait at least 31 days before buying back the stock.
One stock that is likely to experience its share of tax harvesting is General Electric (GE). If you like GE’s chances of rebounding in 2018 but want to take a tax loss in 2017, you have up to the last trading day of the year to sell and book a loss. You must then wait at least 31 days before buying back the stock.
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