As we near the end of 2016, individuals with taxable investment accounts should be evaluating their tax situation and considering favorable tax-saving strategies before the year is over. Year-end tax planning can be a valuable and money-saving opportunity that should not be overlooked. Therefore, if you are holding investments in stocks, mutual funds, and bonds that are worth substantially less than their original purchase price, you should consider selling the investments before the year is over. Through a process known as tax-loss selling, losses on bad investments can be turned into an asset, which can then be used to save money on your taxes for the year.
What is tax-loss selling?
Tax-loss selling is the process of selling investments that are worth less than the purchase price, to realize a loss. An …show more content…
Under the wash sale rule, the IRS will not allow you to realize a loss on the sale of an investment if you repurchase it within 30 days, before or after the sale date. For example, if you own 100 shares of Exxon Mobil and know that you are going to soon sell the stock to realize the loss but still want to maintain your position in the company, you cannot buy an additional 100 shares on November 30 and sell your original shares on December 20.
Additionally, you cannot sell your position in the stock on December 20 and then buy it back on January 15; you must wait at least 31 days before and after the sale date before the position can be reestablished. However, you can buy a similar security that will highly correlate with the return of the one that is sold. For example, if you sold your shares of Exxon Mobil but are optimistic on the energy sector, you could buy an ETF with similar risk characteristics with the energy sector, such as the Vanguard Information Energy ETF (VDE) as a placeholder until the wash sale rule