Tax Planning During Market Volatility

One common planning opportunity usually discussed as the year end approaches is harvesting capital losses. It is a good idea for taxpayers to review their stock portfolio to see if there are any stocks in a loss position that should be sold to recognize the loss to offset any capital gains that have been recognized within the portfolio during the year. Many times, these loss stocks may be good stocks that the taxpayer would like to maintain in their portfolio because they believe there is still upside potential for the stock.

A stock may be sold to capture the loss and then re-acquired. However, the “wash sale” rules must be considered, otherwise the taxpayer will run the risk of not being able to use the loss. Under the “wash sale” rules, if the same stock is re-acquired within 30 days of the sale of the original stock for a loss, then the loss is disallowed. The loss will not be lost forever. The basis of the newly acquired stock is increased by the disallowed loss, so the loss will be recognized upon a subsequent sale of the stock.

With the recent decline in the stock market, it may make sense to review your portfolio with an investment adviser to determine if there are any stocks which should be harvested for losses. Just keep the “wash sale” rules in mind if you are planning on re-acquiring the stock.