Prune and Harvest

With the New Year just around the corner, many people will look at their investment portfolios for capital losses to deduct from their 2019 tax bill. But even when you own securities and mutual fund shares* that have experienced rough sledding the past 12 months, selling may not be the right response, despite the tax advantages.

The Basics

There are two types of investment gains or losses when it comes to federal taxes. You pay ordinary income tax for gains on investments owned for a year or less, just like your work income. Investments held for more than one year incur capital gains taxes when you sell them. For most taxpayers, this capital gains tax rate is lower than rates for ordinary income.

A capital gain or loss is the difference between your basis — what an asset or investment cost — and what you get for selling it. If realized capital losses are greater than your capital gains, you can deduct up to $3,000 a year, or up to $1,500 if married and filing a separate return. You may carry forward any losses over this annual cap to the next tax year. Using these losses as a deduction is sometimes called “tax-harvesting.”

Considerations

Because gains or losses affect taxes only when “realized” after investments are sold, you will need to look at your entire investment approach. If you have a long-term investment strategy, selling an asset that has lost value during the past tax year isn’t necessarily a slam dunk, especially if it provides steady income, has strong long-term prospects and fits well into a diversified portfolio.

Likewise, you might sell an investment, even if it has gained in value, because it no longer fits into your long-term investing approach. Talk to a financial professional to learn more.

*Investors should consider the investment objectives, risks and charges and expenses of the fund carefully before investing. Contact the issuing firm to obtain a prospectus which should be read carefully before investing or sending money. Because mutual fund values fluctuate, redeemed shares may be worth more or less than their original value. Past performance won’t guarantee future results. An investment in mutual funds may result in the loss of principal.