Stocks go down. Is it time to collect lost taxes? | Smart Change: Personal Finance
The stock market has been on a tough road this year. Now, many people are looking at losses in their investment portfolios.
If your investments go down, you may be wondering if it’s worth waiting for things to end and giving your portfolio a chance to recoup or strategically sell shares at a loss. Here’s what you need to know.
Tax loss harvesting can work in your favor
The goal of investing is to make money, not lose money. But sometimes, portfolio losses are inevitable. The good news is that you can use these losses to your advantage.
Capital losses can be used to offset capital gains. And if you don’t have capital gains to cancel out, you can use capital losses to offset a limited amount of income.
Should you do some tax loss harvesting now that stocks are down? It depends.
First, you’ll need to consider whether the stocks you’re looking to sell are likely to recover. It is important to remember that many stocks are now falling due to the broad market downturn. But if you still believe in these companies, you may not want to rush to dump them.
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Second, you will need to consider if you are looking for capital gains in your portfolio. If you sold the shares at a profit this year or are planning to do so, you may want to take a strategic loss to eliminate or reduce your tax liability. But if you’re not looking for a capital gain, the only benefit you’ll get from selling the stock at a loss this year may be the option to recoup up to $3,000 in ordinary income.
If you are in a higher tax bracket, this may translate into appropriate savings. But will these savings be enough to offset the loss in your portfolio? This is the question you really need to ask yourself.
When will stocks recover?
Some investors may be eager to sell the shares now before their values drop further. and some may need to For sale sooner rather than later to free up cash.
But if you’re convinced that your wallet will recover in time, your best bet really might be to leave it alone. We don’t know when stocks will recover from the latest bout of turmoil. The truth is, it can take weeks, months, or even years.
As such, you will need to consider your investment horizon. If you’re holding shares to cash in on retirement and that milestone is decades away, you might want to wait and see things come to an end.
How about selling shares to buy other assets?
If you have a stock in your portfolio that has lost its value and you don’t see it recovering well, you may want to get rid of it and use your released money to buy another stock with greater potential. Or you may decide to use the proceeds of the sale to invest in the broad market while it is down by raising exchange-traded funds (ETFs).
There is nothing wrong with this strategy either. In the end, selling stocks at a loss is a bit of a gamble. But if you take the time to think things through, you may be able to use the current stock market slump to your financial advantage.
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