This year has seen a spike in market volatility. While this may have made for some sleepless nights among investors, Charles Reinhard points out at InvestmentNews.com that this same volatility is offering investors an opportunity for year-end tax-loss harvesting.
Tax-loss harvesting is a strategy whereby an investor sells assets for a loss to offset the gains generated by selling assets that have risen in price. Reinhard points out that the benefits of tax-loss harvesting depend on an investor’s unique circumstances, but it is a way to offset unavoidable taxes owed due to capital gains.
However, Reinhard also warns investors to be aware of the wash-sale rule when harvesting losses. This rule prohibits taxpayers from claiming a loss when selling a security and, within 30 days before or after this sale, buying a “substantially identical” security or an option to do so. While buying and selling the same stock would be a clear violation of the wash sale rule, buying and selling different actively managed mutual funds within the same category does not violate the rule.
The increase in volatility in U.S. equities, as well as international equities, emerging market equities, high yield bonds, commodities and other asset classes, may offer an opportunity for investors to harvest tax losses. However, it is a good idea to consult with an investment or tax professional regarding tax-loss harvesting strategies.
With tax season fast approaching, AAII offers a wealth of resources to help investors with their personal tax planning:
- The Individual Investor’s Guide to Personal Tax Planning 2015
- Keeping Transactions Clean From the Wash-Sale Rules
These articles are only a few examples of the many benefits of AAII membership. To learn more, consider a risk-free 30-day Trial AAII Membership to start becoming an effective manager of your own assets.