Even in a robust market like 2024, investors can potentially capitalize on tax-loss selling strategies by identifying securities in their taxable portfolios trading below their cost basis. This allows offsetting gains elsewhere, potentially reducing tax liability. The article delves into the mechanics of tax-loss selling, cost basis calculations, and the importance of choosing specific share identification methods for maximizing these opportunities.
A specialist studies monitors on the New York Stock Exchange trading floor in New York on November 21, 2024. (AP Photo/Ted Shaffrey, File)The U.S. market gained more than 25% for the year to date through mid-December 2024. That’s a healthy showing by any measure. It doesn’t seem like it would be a market environment that’s conducive to tax-loss selling . But unless your strategy is to buy only U.S.
stocks, you may indeed have opportunities to realize tax losses in your portfolio, which you can use to offset gains elsewhere. That’s because other market segments haven’t performed nearly as well.It’s important to note that tax-loss selling is only a worthwhile strategy if you have taxable accounts. To benefit from a tax loss that in turn can help you save on taxes, you need to find holdings in your taxable portfolio that are trading below your cost basis — your purchase price adjusted upward to account for any commissions that you paid along with reinvested dividend and capital gains distributions. There are different methods for determining cost basis. The specific share identification method for cost-basis elections provides the most opportunities for tax-loss selling or gain harvesting because it allows you to cherry-pick specific lots of a security to sell. But it’s important to note that the average cost basis is usually the cost-basis election default for mutual funds, while the default cost basis election for individual stocks is often first in, first out. In other words, unless you select a different cost-basis election before selling, your investment firm will report your loss or gain using the default. If you sell securities and your sale price is lower than your cost basis, you have a capital loss. That loss, in turn, can help offset taxable gains elsewhere in your portfolio. (With many mutual funds again poised to make big capital gains distributions in 2024, those losses could come in hand
Tax-Loss Selling Investment Strategies Capital Gains Cost Basis Portfolio Management
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