Given the investment environment over the past several years, it is a pleasure for me to blog on the topic of tax-loss harvesting. Tax-loss harvesting is the process of realizing losses in order to offset realized gains. It is a pleasure to blog about because loss harvesting will be more difficult this year than it has been since 2007. Generally speaking, the market's recovery over the past year and a half means that gains are more plentiful and losses are more rare. This places investors in the happy circumstance of having to be smarter about how we harvest, which requires knowing the rules. It is also a timely topic because the tax year is almost over.
The first step for any investor considering such a tax avoidance strategy is to find out what realized gains they have already booked in 2010, and what they will book (ex. mutual fund distributions) by the end of the year. Next, determine if there are any loss carry forwards from the "Great Recession" years of 2007, 2008 and some of 2009. If these are insufficient to offset expected gains, perhaps there are some investments in your taxable account that haven't yet recovered. Realizing any such losses can save you money on taxes now. However, investors beware the wash-sale rules. The government disallows you to sell an investment and book the loss only to buy it back within 30 days.
Because of the uncertainty surrounding tax rates this year it is especially important to note that the wash-sale rules do not apply to gains. You may "scrub" your account of gains by selling and buying right back the same investment. This strategy effectively realizes gains early while in a relatively low tax environment and raises the cost basis so that future gains are lower.
While these suggestions are general in nature, we are always happy to provide you with specific tax advice tailored to your particular circumstances. Our Director of Tax Services, Joe Arena, can be reached at 585-340-2200.
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).