Tax Selling
Candlefocus EditorThe most common type of tax selling is known as a wash sale. This occurs when an investor sells an asset through a broker in order to realize a capital loss, while simultaneously repurchasing the same asset from another broker within 30 days of the sale. For example, an individual may sell stocks owned in a taxable account at a loss and then buy back the same stock within 30 days, either in the same taxable account, or in another individual or joint account. The Internal Revenue Service (IRS) considers this a wash sale and disallows any capital loss deductions resulting from the transaction.
Other types of tax selling include the sale of mutual funds and capital gain distributions, as well as selling to recognize a loss from stock that has been held in a taxable account for more than a year. In both cases, the proceeds of the sale can be used to reduce gains in other investments and can potentially lower the investor’s overall income tax liability.
Before taking advantage of tax selling, an investor should understand how their investment losses or gains will affect their taxes. It is important to review current legislation, as well as to keep track of the assets held in various taxable accounts and properly document transaction details. An investor may want to consult a tax specialist to get an accurate opinion of the strategy’s benefit and make sure any potential gains or losses are taken into consideration.