Year-End Tax Tip: Sometimes It’s Good To Be A Loser / Tax Loss Harvesting

Jessie Szymanski writes for NASDAQ:  What is tax loss harvesting?

Tax loss harvesting is purposefully selling an investment at a loss.

How on earth could that help? Because the government taxes you on your total gains for the year , you can use losses in one part of your portfolio to offset gains in another, and reduce your total tax bill.

This technique can make a difference in your tax bill and on your long-term returns. The federal government currently taxes long term capital gains (from the sale of investments held more than 1 year) at a rate up to 23.8%, and short term capital gains at an individual's ordinary income tax rate. This year, the highest income tax bracket is a whopping 43.4%*.

According to the IRS , you can also carry your losses forward indefinitely. So make sure you've used up all of your losses from prior years ( 2008 is a good place to start!) to make sure you're not leaving some losses on the table.

Where should I look in my portfolio this year?

Check your monthly statements to see where you're at a loss or gain. US stocks have had a good run this year, but this list of the Six Worst S&P 500 Stocks of 2013 proves that not all stocks are winners.

How can I stay invested during the meantime?

If you're looking to sell individual stocks to offset gains, diversified ETFs and mutual funds can help you stay invested during what's known as the "wash sale" period.

The "wash sale" rule says that an investor can't claim a loss on the sale of an investment and then buy a "substantially identical" security for the period beginning 30 days before and ending 30 days after the sale. (Think of it as the government's insurance policy-they want to make sure that investors don't get a tax break and then instantly buy back their original investment.)

Because ETFs and mutual funds hold many stocks or bonds, (and so look very different from an individual stock), they can be great candidates for reinvesting your money during the 60-day period.

Bottom line: there's still hope to reduce your tax bill this year. In between trips to the mall and grocery store, take a quick look at your investments to see where you can save this year-I promise you won't regret it.