While many people use their tax refunds for a vacation or a big screen TV, you may want to consider more long-term financial priorities.
Tax Loss Harvesting: What to Consider Dumping?
As discussed in the blog, “Can Tax Loss Harvesting Help Offset Gains?” tax loss harvesting, which involves strategically selling underperforming assets in your portfolio, can help lower your capital gains tax bill.
But how do you determine what specific securities to sell, if you want to sell at all?
“The determination of what to keep and what to sell in a portfolio for tax loss harvesting isn’t always so crystal clear,” said Joe Correnti, senior vice president of brokerage product at Scottrade. “However, several factors can be weighed. Of course, all decisions should be based on your unique situation and financial goals.”
You should consult with a tax professional to determine whether tax loss harvesting or any other tax strategy is right for you. But when deciding what to cut from your portfolio, here are some possible considerations.
- Diversification: You can sell losing assets that allow you to get your portfolio back to your desired target, or if you want to increase or decrease exposure to a certain asset class. In either case, you would sell losing securities or a partial position in an asset class that might be down.
- Length of time: Tax loss harvesting can be most advantageous in limiting the taxes paid on short-term capital gains. These gains on securities held for 1 year or less are taxed at an ordinary income rate, compared to the preferential tax treatment on securities held for more than a year, which are taxed at preferred rates. You may want to consider selling securities held for a shorter period of time so that more of your portfolio is taxed at the lower long-term capital gains rates.
- The size of the position: If the underperforming asset only comprises a very small portion of your total portfolio, the tax benefits of selling might be nearly as significant as one that comprises a very large segment of your portfolio. While selling off even the smallest sliver of your portfolio could provide some tax benefits, you may want to start by looking at the larger positions first. But in the end, it depends on how much of your capital gains you want to offset.
- Third-party research: When in doubt, you may want to consider selling securities that are given poor ratings by analysts or other researchers. Scottrade offers a variety of research on everything from stocks and bonds to ETFs and mutual funds.
What factors do you consider when you’re tax loss harvesting?
Next Step: Our Gain/Loss & Tax Center provides you with the latest in cost basis calculation and tax strategy.
The information and content provided is for informational and/or educational purposes only. The information presented or discussed is not, and should not be considered, a recommendation or an offer of, or solicitation of an offer by, Scottrade or its affiliates to buy, sell or hold any security or other financial product, or an endorsement or affirmation of any specific investment strategy. You are fully responsible for your investment decisions. Your choice to engage in a particular investment or investment strategy should be based solely on your own research and evaluation of the risks involved, your financial circumstances, and your investment objectives. Scottrade, Inc. and its affiliates are not offering or providing, and will not offer or provide, any advice, opinion or recommendation of the suitability, value or profitability of any particular investment or investment strategy.
Diversification does not assure a profit, or protect against loss, in a down market.
Scottrade does not provide tax advice. The material provided in this article is for informational purposes only and Scottrade is not responsible for any errors or omissions. Please consult your tax or legal advisor(s) for questions concerning your personal tax or financial situation.
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