As we approach the end of the year, some investors are going to try to minimize their taxes by selling stocks. Someone recently asked me when you should sell, and the answer can be complicated depending on your situation.
Offsetting a Loss
If you have sold investments in the past for a loss, the IRS will allow you to sell investments for a gain without paying taxes. For example, if you sold stock for a $1000 loss in January and you have an ETF with a $1200 gain that you want to sell, you can sell it in December and only have a tax liability for the gain on $200.
If you need that $1200 right away, it is probably smarter for you to sell in December than wait until January. Something to keep in mind, however, is that capital losses can be carried over to future years. If you were planning to keep the investment, there is no reason to rush and sell.
Offsetting a Gain
Just like in the situation above, you can offset a gain with a loss. If you sold stock in January for a $1000 gain and are holding onto a stock in the red, you can sell it in December to lower your tax liability.
Unlike capital losses, capital gains cannot be carried over to future years. You can’t defer paying taxes when you make money. If you are holding onto a stock that does not have a bright future, it might be a good idea to get rid of it before year-end.
Make Smart Decisions
In the end, you will always end up paying the net gain on your investments. Whether it is in 2012 or 2052, you will have to pay someday. It is more important to focus on the long-term value of your portfolio than game the system for tax reasons.
Unless you expect capital gains tax rates to significantly increase or decrease in the future, you should focus more on your investment decisions and just pay the taxes as they come. The IRS has complex rules for dealing with capital gains, but you should let your accountant (or TurboTax) worry about that and just focus on making money.
Get The Big Picture
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