Selling Losing Investments as Part of a Year-End Tax Strategy

William Perez for About.com writes: Individuals may want to evaluate their investment portfolio before the end of the year whether to sell off any investments that have lost value in an effort to book capital losses for this year.

From a tax perspective, higher-income people may find that their investment income, including capital gains, is subject to the new 3.8% Net Investment Income Tax. Higher-income people also face higher tax brackets with a new 20% rate on long-term gains for people in the 39.6% tax bracket, while short-term gains are subject to the ordinary tax rates which could be as high as 39.6%. Selling investments that have lost value can help lower the amount of net gain subject to the income tax and the net investment income.

From a non-tax perspective, the end of the year may be a good time to take evaluate your investments and how they are performing. "Are you satisfied with their performance compared to the rest of the market?," is a crucial question, according to Deborah Fowles (About Financial Planning, How To Do An Annual Financial Checkup). You may also want to adjust your investment strategies, and here I'd recommend reviewing the Eight Secrets to Improving Your Portfolio Returns from Joshua Kennon (About Investing for Beginners).

If you are going to re-design your investment portfolio, that may involve selling losing stocks or funds. There some tips to remember when it comes to capital losses. Keeping these in mind can help you reduce taxes this year and next.

1. Capital losses offset capital gains in the year that the investments are sold off. If your losses exceed your profits, then the net loss is tax deductible up to $3,000 in net losses for the year.
2. The remainder of the losses carries over to the subsequent year as a capital loss carryforward.
3. Losses may be deferred under the wash sale rule if you repurchase the same investment within one month of selling.

These three points create planning opportunities. Consider the limit on net capital losses. "If you have already realized net capital losses exceeding $3,000,... you may want to realize capital gains that will be absorbed by the excess loss," recommends the authors of JK Lasser's Your Income Tax. By pairing losses with gains, investors can sell off their profitable holdings at no tax cost.