Despite the U.S. stock market’s strong performance, with a 25% increase in 2024, there are still opportunities for tax-loss selling, especially for investors with taxable accounts.
Tax-loss selling can help offset taxable gains by realizing losses in underperforming areas of your portfolio, offering potential tax savings.
While the broad market has done well, certain sectors, like bonds and specific stocks, may still be trading below your purchase price, creating opportunities for tax-loss harvesting. This strategy is particularly relevant if you have taxable accounts, as it allows you to use capital losses to offset taxable gains from other investments, Yahoo! Finance reported.
To benefit from tax-loss selling, you must identify securities in your portfolio that are trading below your cost basis — your purchase price, adjusted for commissions and reinvested dividends.
The key to tax-loss selling is understanding your cost-basis method, as it directly affects the sale of investments.
Different cost-basis elections can impact your ability to realize tax losses or gains. For example, specific share identification allows you to sell specific lots of securities, potentially maximizing your tax-loss opportunities. However, if you don’t actively choose a different method, your investment firm may automatically apply the default cost-basis method, which could limit your options.
Once you realize a capital loss by selling an underperforming asset, that loss can offset any taxable gains you have in the same year. This can be especially beneficial when facing substantial capital gains distributions, which many mutual funds may make in 2024.
If your losses exceed your gains or don’t have gains to offset, you can use the remaining losses to reduce up to $3,000 of ordinary income. Even better, if you don’t use all of your losses in the current year, you can carry them forward indefinitely to offset future taxable gains. This flexibility makes tax-loss selling a strategic tool for long-term tax savings.
As 2024 comes to a close, there are a few specific areas in your portfolio to focus on for potential tax-loss selling.
Long-term bond funds and ETFs have struggled in recent years, especially with the Federal Reserve’s interest-rate hikes. Even after recent rate cuts, many bond funds still show losses, particularly those in long-term bonds. These losses could provide valuable opportunities for tax-loss selling. Even intermediate-term bond funds have faced modest declines, which may be worth realizing if your position is large enough.
Tax-loss selling doesn’t just help you reduce your tax bill — it can also improve the overall asset allocation of your portfolio. For example, many fixed-income investments are better positioned in tax-sheltered accounts like IRAs or 401(k)s rather than taxable ones. Using tax-loss selling, you can strategically move these investments into tax-advantaged accounts, potentially boosting your portfolio’s long-term performance. This move is particularly important as yields are higher in today’s market, making asset location even more crucial than when yields were lower.