How to Offset Capital Gains – Tax Loss Harvesting
In my previous article, I discussed capital gains. For this article, I thought I would take the time to discuss a topic know as tax loss harvesting. Tax loss harvesting is selling securities at a loss to offset capital gains. Loss harvesting is typically used to offset short term capital gains which are taxed at your ordinary income tax rate. Knowing when and how to use tax loss harvesting is an important part of tax planning strategy for any taxable account you may have.
In addition to offsetting gains with your recognized loss, you can use losses that exceed your capital gains to offset ordinary income, up to a maximum of $3,000 per year. Losses that exceed the $3,000 threshold can be carried forward into future tax years.
The IRS has ruled that if you do sell securities for a loss, you must wait 30 days before buying the same or “substantially identical” securities. For those of you that would like to claim the loss, but do not want to be out of the market for 30 days, an option would be to purchase a security similar in investment objective. For example, you could recognize losses from Columbia Value & Restructuring to offset capital gains you may have. You could then purchase a similar fund such as the Wasatch-1st Source Monogram Income Equity Fund or the Croft Value fund.
This article is not intended to be a recommendation for any of the above funds. Please consult a tax advisor regarding your individual needs or circumstances in relation to tax planning.
Buck Wendel, Investment Advisor
January 5th, 2009 at 5:48 pm
Buck,
is it true that one can also deduct the fee’s incurred to manage your investments? The subscription cost’s to charting, analysis, research services or even those for Smart401K.
January 8th, 2009 at 8:14 pm
Bill,
Thank you for the inquiry. Subscriptions to investment services are deductible as a miscellaneous itemized tax deduction on Form 1040, Schedule A by investors. They are subject to the 2% AGI floor. You will want to consult your tax advisor to make sure itemizing your deductions is the best course for you.
February 2nd, 2009 at 4:30 pm
What happens if you sell a mutual fund in a taxable account at a loss then buy the same mutual fund back, on the next day, within a 401k or IRA?
February 4th, 2009 at 5:16 pm
Randy,
Thank you for the inquiry. Since the repurchase is in a related account, the loss will be disallowed by the IRS under section 1091 of the tax code. I have included a website address below for more information regarding this rule.
http://www.irs.gov/irb/2008-03_IRB/ar08.html