Dec. 31 is a long way off, but it’s not too early to start thinking about year-end tax maneuvers like selling money-losing investments. The stock market’s recent downturn may provide some opportunities that might not be there if you wait until the last minute and the markets rebound.
Decisions you make now, such as which of the four accounting methods to use if you sell just a portion of a holding, could affect your tax bill for the year and determine the accounting method you must use in the future.
The idea is to “realize” or “harvest” losses on investments that are now worth less than you’d paid. It generally doesn’t make sense to do this if you think the investment will rebound and you want to own it for the long term. But when an investment turns into a disappointment and it’s time to say goodbye, make the most of the tax benefit by moving your money to something more promising. (Investors also may need to sell winners from time to time, to raise cash, diversify holdings or rebalance a portfolio.)
If you’re of two minds, it could make sense to just trim the holding rather than bail out completely. There are a variety of reasons why you might want to sell just part of an investment – a portion of stocks or mutual fund shares, for instance. In that case, you’ll have to decide which of four methods to use, each with its own combination of tax benefits and paperwork hassles.
Once you’ve picked an accounting method, you’ll generally have to stick with it for subsequent sales of the same investment, such as a block of mutual fund XYZ. You can, however, use different methods for different holdings.
The most common method, assumed by most brokerages and fund companies unless the customer orders something else, is the average-cost, single-category method. It calculates the average you cost you paid per share.