Tax Tip #3: Adjust the timing on your investment sales to push gains into next year and losses into this year.
You should never — and I repeat, never — make an investment decision based purely on tax minimization. Taxes should be a consideration, but fearing the tax man alone is not a legitimate reason to hold on to an appreciated investment you feel might be at risk, nor is it a legitimate reason to sell an investment that has fallen in value but that you still feel is a bargain.
That said, if you’re going to do a little portfolio pruning, this is a good time to do it. We all make that occasional bad investment, and it’s prudent to cut your losers.
And if you’ve been looking to take profits or rebalance, it makes sense to wait until after the first of the year, so long as you’re observing your usual trading rules (following stop losses, etc.)
If you sell an investment to harvest a tax loss, you’re subject to the wash sale rule. This means that you can’t buy it again within 30 days if you want to claim the loss for tax purposes. But there is absolutely nothing in the rulebook that says you can’t buy substantially similar securities. For example, you could take a loss in the SPDR S&P 500 ETF (SPY) and buy the iShares Core S&P 500 ETF (IVV) the very same day and not be subject to the wash sale rule.
Given that the market is near all-time highs, portfolio losses might be few and far between. But it’s good advice to keep in mind during the next correction.