For Women & Co., by Gabby Phillips, Associate Director of Content
Capital gains taxes don't have to sap the joy out of investing or deter you from selling to rebalance your portfolio. There are effective methods to help manage the tax burdens sometimes imposed on your successful investments.
1. Hold out for long-term gains.
When you sell or exchange certain investment assets like stocks, usually any profit you reap is considered a capital gain. Profits on stocks and bonds held longer than a year are deemed long-term capital gains and are taxed at a more favorable rate than those owned less than a year. Short-term gains, the profits on assets held less than a year, are subject to ordinary income tax rates. This can be a whopping 15 percent difference in some cases, depending on your tax bracket. So hold out for a year if you can.
2. Sell costly shares first
Let's say you decide to sell shares of a particular stock from your portfolio. You may have bought this stock at different times and at different prices. To help manage your taxable gain, consider selling first your shares with the highest cost basis -- or purchase price -- and/or those which have been held for more than one year. Make sure to specify which shares you're selling and request written confirmation of the specific shares sold for tax purposes. If you do not have written confirmation of the specific shares sold, the IRS will assume that the first shares you sold were the ones you owned the longest. But watch out: If the IRS-picked shares are among the shares purchased at a lower-cost, then you could be on the "hook" for a larger tax bill.
3. Make lemonade out of losses.
Stock losses may seem like a bad thing -- and they are -- but you can use them to your advantage. Sometimes it may make sense to offset larger gains by selling shares of another stock at a loss, thus reducing your net tax liability. In fact, any year in which your total capital losses exceed your total capital gains, you may be able to deduct some of your net loss from overall taxable income.
It's important to keep your asset allocation in sync with your goals and risk appetite.
So speak to your financial professional and accountant to put a tax-smart rebalancing strategy in place for your portfolio -- and to learn more about the tax implications of a "net-loss" situation.
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