It's Tax-Loss Selling Time. Here's How To Play It
Harvest capital losses and/or buy good stocks on sale
Another year is ending, and a bunch of our stocks are down. That’s not ideal, but it is an opportunity to discuss some useful ways to optimize a portfolio. Among them:
Selling a stock for less than you paid generates a capital loss that can offset capital gains, thus lowering your tax bill. If capital losses exceed capital gains in a given tax year, you can carry over the excess to reduce future years’ taxes.
Capital losses can also, up to a point, offset regular income. Either way, they’re fun to plug into TurboTax and watch your tax bill shrink.
Tax-loss seasonal bargains
When investors harvest capital losses by selling their underperforming stocks in November and December, they push already-beaten-down stocks even further into the red. With high-quality but temporarily depressed stocks, this can create bargains for people who are paying attention and willing to buy into the weakness. So if you have your eye on a particular stock and have been waiting for it to fall just a little more, this is the time of year when you might get your wish.
The January effect
Tax loss selling ends in late December, leaving fewer sellers in January. Less selling frequently combines with normal levels of buying to give beaten-down stocks a nice pop.
Wash sale risk
Once you harvest a capital loss, you can’t repurchase that stock for 30 days or the IRS will disallow the tax deduction. And if the stock soars during that one-month gap, you miss out on those gains.
To sum up, one way to play tax selling season is to sell your losers to harvest the capital losses and buy other people’s losers to exploit the January effect.