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.
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9 thoughts on “What Is the Best Time of the Year to Sell Stocks”
I just started getting stocks so I’m keeping them for awhile.
That is the smartest way to go!
I try not to recommend tax harvesting too much, especially if that is the only reason to sell a stock. If you bought it because it paid a high-yielding dividend and had a history of year-over-year increases, yet it lost some value in the current year but still held the dividend characteristics, then I would say to leave it be (especially since reinvesting the dividends would get you more shares). But, if you bought a stock for the growth potential and it has done nothing, then I would say it’s ok to sell for the tax benefits.
Great advice. I am just getting into stock investing and I need to learn more about the tax benefits/rules. Thanks for sharing.
Focus more on the stocks and the long term before you spend too much time worrying about taxes.
At year-end I will sell off some losers for the tax benefit, but I will quickly put my capital right back to work. The only other time I sell is to re-balance or re-position my portfolio. One important thing: be careful of wash sale rules, there is a good post about that here: http://novelinvestor.com/investing-basics/know-the-wash-sale-rule-when-selling-those-losers/
Good advice. I got caught up with a wash rule once before without realizing it exists.
I try to sell some losers in early December. I find that stocks drop near the end of the year because everyone is selling off their losers so I moved up a bit. I think I’ll move it even earlier next year and try to do it in November.
Interesting strategy, but it makes a lot of sense
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