Tax selling is when investors sell assets that have decreased in value to offset capital gains and reduce tax liability. The process involves identifying assets with losses, avoiding the wash sale rule, and executing the sale before the end of the year. Consulting a tax professional is recommended.
Tax selling is a process in which security owners attempt to take advantage of a loss in value. While taking losses is not necessarily something people like to do, it can be used to offset all or part of a capital gain that has been made on another investment. In this way, the tax liability for that year can be significantly reduced.
Often referred to as a tax loss sale, the December period is typically the time when this transaction occurs. This is when investors usually have a better idea of where their capital gains situation is for the year. One of the key words in this process is “realized”, since there are no tax consequences for profits until the asset is sold.
The first step in the tax sale process is usually to look at your portfolio of other stocks, bonds, mutual funds, or other assets you own to determine if any of them are currently trading below the price you paid. This is done after first discovering that capital gains will in fact be realized during the year on one of the holdings. If there is a loss on parts of the portfolio, these may become candidates to generate capital losses through the tax sale, helping to offset capital gains.
It may be important to note that whatever sells, a similar item cannot be purchased within 30 days. This is known as the wash sale rule which states that if an essentially similar investment is purchased within 30 days of the sale of the original, the loss taken cannot be used to offset the gain. A similar investment might be to sell the shares of one computer hardware company while buying the shares of another. For this reason, the decision of what to sell generally must be carefully considered.
The final step in the tax sale is to execute the sale of the asset the owner is willing to part with to capture the loss and offset gains made elsewhere. Tax sales can be a critical part of anyone’s year-end tax planning, because the goal of most is to minimize the amount of money that must be paid to the federal government. It is often a good idea to consult with a tax professional to determine if this strategy is right for a particular investor.
For the most part, the tax sales process is usually straightforward. The Last Day for Tax Sale is the last trading day of the year for the loss to be considered for current year taxes. Although trade may be established after January 1st, it is the trade date that matters at tax time.
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