It’s common practice this time of year for investors to sell their losers in order to reduce the tax burden on their gains.  With this year’s volatility, you are likely to have some holdings with unrealized losses, and hopefully some with gains.  It might be worth it to realize those losses before the end of the year so you can capitalize on the tax benefits.  Investors can deduct up to $3,000 of capital losses a year from their capital gains.  Any additional losses can carry over into future tax years.

Here are some expert tips to make the most of your losses.

Harvest your losses sooner than later

As December 31 nears, an increasing number of investors looking to harvest their losses can result in selling at a lower price due to increased competition.  Jack Houghes of Smart Money reports that an additional downside to waiting is the idea of the “January Effect”, where poor performing stocks during the year tend to outperform the market early in the following year.  Some researchers believe that this is a result of last minute selling from tax loss harvesting driving the price down more than it otherwise would be, followed by an increase early in the year.

Keep in mind that the “wash sale” rule restricts you from claiming that loss if you buy a “substantially identical” security within 30 days of the sale.  If you want to stay invested in the losing fund for the long term, selling sooner means being able to buy it back sooner thus allowing you to benefit from the “January Effect.”

Invest in ETFs to stay in the market

It’s important that you don’t abandon your long term investment strategy for an immediate and short lived tax benefit.   The limitation on buying “substantially identical” securities within 30 days can mean an investor will miss out on an ensuing rebound rally.  According to John Spence of ETF Trends, “this is where ETFs can help out if investors want to keep exposure to the market.”

Buying a fund based on the same index might violate the wash sale rule, so the key is to invest in an ETF that tracks the same sector you want exposure to, but that’s based on a different index.

Most importantly, make sure the replacement ETFs you choose fit your long term goals.

Tell Us:  Have you already harvested your losses?

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