Now that autumn's upon us, what better time to talk about harvesting? Tax-loss harvesting, that is.
"Tax-loss harvesting is a basic concept to sell investments, stocks, bonds [or] anything that you own that has actually gone down in value," said Ron Carson, founder and CEO of Carson Wealth Management Group.
The upside of tax-loss harvesting for investors is that they can protect their losses and either use them against future gains or write off up to $3,000 against ordinary income for the year, he notes.
Carson said it's a mistake to wait until year-end to harvest tax losses. That's because, first, "normally everyone is going to be identifying the same investments or stocks that have gone down, and so you may in fact be selling at a lower price than you need to," he noted. "The other issue is, a lot of times in December volumes could actually dry up, so I think you should take [tax losses] all throughout the year."
He added, "Be proactive in harvesting those tax losses."
There are two basic strategies in harvesting tax losses. First, you can double your holdings in a company whose stock is down, wait 31 days, and then sell the position and take the loss, he said. "The other strategy is to sell immediately — but then before investing in another equivalent security.
"You have to wait 30 days or you're subject to the wash[-sale] rules, and the wash rule says anything that is substantially identical or the same," said Carson. "So, basically, the same type or security will cause that tax loss to be invalidated."
Carson advises caution. "If you have a company that moves and is volatile, you could end up buying it back at a higher price, and so that tax loss doesn't give you the financial gain you'd hoped for."