In a good year, you may want to lock in gains by strategically selling appreciated assets. “But try to avoid selling stocks you’ve held a year or less, since they’ll be taxed at your individual rate for ordinary income, while you’ll pay no more than a 20% tax on long-term investments2,” Navani says.
When you sell, you may be able to take advantage of tax-loss harvesting, or selling investments that have dropped in value to offset taxable gains. If you have more capital losses than gains, you can generally deduct up to $3,000 of capital losses per year from your ordinary income (or $1,500 if married and filing separately). And if your net capital losses exceed that yearly limit, you can carry over the unused losses to the following year. Your advisor can look for opportunities to do this throughout the year.
Bear in mind that if you wait until late in the year, you’ll be dependent on what happens in the markets in the year’s final weeks. And if you buy substantially identical stocks within 30 days before or after the sale, it will be considered a “wash sale,” and any losses will be disallowed.
While taxes should be factored into your investment decisions, buying or selling assets solely to avoid taxes could be counterproductive. For example, in a strong market, you might look at capital gains taxes as a necessary cost of capturing substantial gains, Navani says. By contrast, investors who hold on to assets for fear of owing taxes could lose out if those assets drop in value.
All the more reason to work with your advisor to think through every consideration about your life and financial goals — not just the tax implications — as you make your investment decisions throughout the year.