The U.S. market has shown significant growth, gaining over 25% year-to-date through mid-December 2024. Despite this strong performance, there are still opportunities for tax-loss selling in other market segments that have not fared as well.
To engage in tax-loss selling, it is essential to have taxable accounts. This strategy involves selling holdings in your portfolio that are trading below your cost basis, allowing you to offset gains elsewhere and potentially save on taxes.
There are various methods for determining cost basis, with specific share identification offering the most flexibility for tax-loss selling. It's crucial to understand the default cost basis election for different types of investments to make informed decisions.
If you sell securities at a price lower than your cost basis, you incur a capital loss. This loss can be used to offset taxable gains or up to $3,000 in ordinary income. Unused losses can be carried forward indefinitely for future use.
As 2024 comes to a close, potential tax-loss sale candidates include long-term bond funds and ETFs, individual stocks, non-U.S. stock funds, sector funds, and short and alternative funds. Investors can strategically utilize tax-loss selling to improve their overall portfolio asset allocation.
When selling securities for a loss, investors should be mindful of the wash-sale rule and ensure replacements are not considered substantially identical by the IRS. Timing is also crucial, as waiting 30 days before repurchasing a security sold at a loss allows you to claim the loss.
Integrating tax-loss selling with a comprehensive portfolio review and cleanup effort can enhance overall financial planning strategies. By leveraging tax-management options, investors can optimize their portfolios for tax efficiency and long-term growth.
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