End-of-year stock harvest, often referred to as tax-loss harvesting, is an investment strategy commonly utilized around the end of the calendar year to improve tax efficiency.
Here are 3 key points about this strategy:
Timing: Investors often focus on tax-loss harvesting towards the end of November because capital gains and losses must be realized by December 31 to impact that year’s taxes. However, this strategy can be employed throughout the year, but the end of the year is particularly popular due to the upcoming tax filing deadline. The next key will discuss the catch.
Wash Sale Rule: You must be careful not to violate the IRS’s wash sale rule, which disallows a tax deduction for a security sold at a loss if you buy a “substantially identical” security within 30 days before or after the sale. To avoid this, investors might wait 31 days before repurchasing the same or a similar security or purchase a different but similar investment in the same sector. My tax-losses are sold before December to not worry about this rule.
Market Trends: Some investors use this time to capitalize on the “January Effect,” where stock prices might increase significantly in January due to tax-related buying following year-end selling. This can be part of a strategy where one sells a stock at a loss in late November or December and buys it back after the 30-day wash sale period, potentially benefiting from year end sale offs.
Most importantly the loss is limited to $3,000 after netting all gains and losses up to December 31. This strategy does not eliminate the loss of value in your investments but can mitigate the tax burden associated with capital gains, making it a strategic move for tax planning. Remember, while tax-loss harvesting can be beneficial, it should align with your overall investment strategy rather than being the sole reason for selling assets.
Blog outline by AI Grok.