Maximizing Tax Savings in a Strong Market
Despite the U.S. market’s impressive 25% gain in 2024, savvy investors can still find opportunities to realize tax losses in their portfolios. This strategy, known as tax-loss selling, can help offset gains elsewhere and reduce tax liabilities.
Understanding Tax-Loss Selling
To benefit from tax-loss selling, you need to identify holdings in your taxable accounts that are trading below their cost basis. This requires selecting the right cost-basis election method, such as the specific share identification method, which allows you to cherry-pick specific lots of a security to sell. Be aware that the default cost-basis election for mutual funds and individual stocks may not be the most beneficial for tax-loss selling.
Where to Find Tax-Loss Candidates
As 2024 comes to a close, consider the following areas of your portfolio for tax-loss selling opportunities:
- Long-term Bond Funds and ETFs: Many bond funds are still in the red, making them prime candidates for tax-loss selling. This can also be a chance to improve your portfolio’s asset location by moving fixed-income holdings to tax-sheltered accounts.
- Individual Stocks: Even if your overall portfolio has performed well, it’s likely that some individual stocks have lost value. With over 1,100 US stocks with market caps of more than $1 billion experiencing losses of 10% or more, there are plenty of opportunities to realize tax losses.
- Non-US Stock Funds, Sector Funds, and Short and Alternative Funds: These areas of your portfolio may also hold tax-loss selling opportunities.
Next Steps
If you sell a security for a loss, you can immediately replace it with a similar holding, provided it’s not “substantially identical.” Consider tying tax-loss selling with a broader portfolio review and cleanup effort. Additionally, if you wait 30 days after selling the losing security, you can replace it with the same security and still claim the loss.
By being proactive about tax-loss selling, you can minimize your tax liabilities and maximize your investment returns.
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