Make us your home page
Instagram

Investment losses may be offset with 'tax-loss harvesting'

NEW YORK

Investors shaken by recent swings in the stock market may make the most of the declines with a strategy known as "tax-loss harvesting."

Stocks fell the most in 14 months in the week ended May 7, and regulators are reviewing a plunge that briefly wiped out more than $1 trillion in equity values on May 6.

Tax-loss harvesting may add as much as 7 percentage points to a portfolio's return in the first year, and even after 25 years, it may add 0.3 percentage points, according to a study by First Quadrant L.P., a Pasadena, Calif., money manager. The strategy refers to the periodic selling of poor-performing assets to get the most out of losses.

"When markets get more volatile, tax-loss harvesting is more effective," said Andrew Berkin, senior equity researcher, who co-wrote the study for First Quadrant, which has $17 billion under management.

"If your portfolio has become out of balance because of the way the market has moved, you can use this event as an opportunity to rebalance."

How it works

Federal tax rules allow investors to offset capital gains with losses. Long-term gains on assets held more than one year are matched against long-term losses, while short-term gains are paired against short-term losses. The long-term and short-term results are matched against each other.

When there is a net loss, an investor can deduct as much as $3,000 against ordinary income. A loss of more than $3,000 can be rolled over to offset gains in future years.

Short-term gains are taxed as regular income and long-term gains are taxed at 15 percent. The long-term rate will rise to 20 percent next year, unless Congress acts. President Barack Obama has proposed that the higher capital gains rate apply to individuals with incomes of more than $200,000 and married couples with incomes of more than $250,000.

"The fact that we haven't recovered yet to where we were means that many investors probably still have a decent stockpile of losses on the books," said Joel Dickson, a principal and tax specialist at Vanguard Group, the largest U.S. mutual fund seller, based in Valley Forge, Pa.

Capital losses may be worth more next year if tax rates are higher, while capital gains cost less this year while rates are lower, Dickson said. For those who expect their tax rates to rise, this year may be the time to realize gains, regardless of whether there are corresponding losses to match against them, he said.

Investors with long-term gains may want to sell this year to lock in the 15 percent tax rate, then buy back the same stock to reset their tax basis before rates go up, said John Battaglia, director in the private client adviser group at Deloitte Tax, a unit of Deloitte & Touche, based in New York.

"A lot of people are thinking of doing that without taking losses, but it would be even more advantageous with them because they wouldn't have to pay the capital gains tax," he said.

Trading restrictions

There is a caveat to tax-loss harvesting: the wash-sale rule. The IRS prohibits investors from taking a loss if they buy the same shares within a period that begins 30 days before a sale date and ends 30 days after.

For those who are thinking about taking losses because of current market volatility, it's important to consider their entire portfolios, Deloitte's Battaglia said. Many investors took significant losses during the market decline of 2008 when the Standard & Poor's 500 Index fell 38 percent, and still have tax losses they can use in future years, he said.

"For people who already have substantial tax loss carry forwards, selling today to take a loss doesn't matter," Battaglia said. "I advise clients to take a tally of their gains and losses throughout the year."

For younger investors who expect that the market will rally again, stockpiling can still make sense, First Quadrant's Berkin said. Investors believed they had plenty of losses after the tech bubble burst in 2000, he said.

"Just when you think you have all the losses you need for the rest of your life, the market rallies," Berkin said. "Having additional losses can prove useful."

Investment losses may be offset with 'tax-loss harvesting' 05/15/10 [Last modified: Friday, May 14, 2010 6:31pm]
Photo reprints | Article reprints

Copyright: For copyright information, please check with the distributor of this item, Bloomberg News.
    

Join the discussion: Click to view comments, add yours

Loading...
  1. Pinellas licensing board asks Sen. Jack Latvala for $500,000 loan

    Local Government

    The troubled Pinellas County agency that regulates contractors wants Sen. Jack Latvala to help it get a $500,000 lifeline from the state to stay afloat.

    State Sen . Jack Latvala, R- Clearwater, is being asked to help the Pinellas County Construction Licensing Board get $500,000 from the state so it can stay open beyond February.  [SCOTT KEELER   |   Times]
  2. Clearwater mansion that sold at record price is back on the market for $19.75 million

    Real Estate

    CLEARWATER — Less than four months after it sold for a record $11.18 million, the waterfront Century Oaks estate is back on the market — for $19.75 million.

    The historic Century Oaks estate overlooking Clearwater Harbor, which sold for $11.18 million four months ago, is back on the market.
[Courtesy: Coastal Properties Group
]

  3. Tampa Bay gas prices jump nearly 10 cents over the week

    Markets

    Gas prices in Tampa Bay are on the rise again.

    Tampa Bay gas prices jumped nearly 10 cents over the past week to an average of $2.15 per gallon. | [Times file photo]
  4. Water Hogs: During drought, hundreds of Tampa Bay homes guzzled a gallon of water a minute

    Drought

    When Amalie Oil president Harry Barkett plunked down $6.75-million for his Bayshore Boulevard mansion, he picked up 12.5 bathrooms, a pool, a hot tub, an elevator and a deck bigger than some one-bedroom apartments.

    During one of the worst droughts in the Tampa Bay region's history, hundreds of houses used more than a gallon of water a minute. ALESSANDRA DA PRA  |   Times

  5. Gov. Scott's tough talk on Venezuela may not turn into economic action

    State Roundup

    TALLAHASSEE — To show his solidarity with Venezuelans, Gov. Rick Scott held a rally in South Florida and repeatedly promised to punish companies that do business with the Nicolás Maduro regime.

    Gov. Rick Scott held a rally July 10 at El Arepazo restaurant to show solidarity with Venezuelans. Scott has said he wants to punish companies that work with the Nicol?s Maduro regime.