When to Take a Tax Loss

NEW YORK (TheStreet) -- Even in the best of years there are bound to be some losers. Fortunately, whatever faults there may be in the tax code, the ability to attenuate investment mistakes isn't one of them. 

Since I actively sell covered options and generate taxable premiums, the thought of offsetting gains is appealing, but before jumping at the opportunity, let's look at the historical record.

I'm struck by one thing in particular when looking at strategic tax losses taken in 2012. Four of five such sales saw their shares outperform the S&P 500 in 2013. Not only did they gain more than 29% from their sale price, but they also gained more than 29% from their purchase prices.

Proponents of the "Dogs of the Dow Theory" readily understand the phenomenon, as perhaps should serial-covered-option writers who repeatedly opine on the same stocks as prices regularly go up and down, sometimes even to extremes, yet so often recover.

Given the choice between taking a tax credit or a stock loss or paying more taxes because of greater gains, I would take the latter every time. However, there is a preponderance of thought that losses should be taken if they reach the 10% level. For those believing in rules, this is a useful rule, if consistently practiced.

If you liked this article you might like

The Retail Apocalypse Is About to Descend on Wall Street This Coming Week

Former Petrobras CEO Bendine Arrested in Bribe Probe

Pirates Step Up Attacks on Petrobras Refineries in the Amazon

Petrobras Stock Jumps on CVM Decision, Lula Conviction

Former Brazilian President Lula Gets 9 Years For Corruption