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As Tax Season Approaches, Start Harvesting Gains and Losses


It is time to look for gains or losses in your portfolio to harvest in order to minimize your tax bill come April of 2013.

It's that time of year again. No, I'm not talking about Black Friday. I'm referring to the end of the year, which means tax planning season. At my firm, we are not experts on taxes or tax planning, but you don't need to be an expert to understand some of the basic rules about harvesting tax gains and losses.

It is time to look for gains or losses in your portfolio to harvest in order to minimize your tax bill come April of 2013. With a little over a month to go, you should be looking at your realized and un-realized gains/losses. It is smart to plan for this with some time to spare.

Step 1: Determine whether you have a total realized gain or loss on your taxable portfolio(s) for the calendar YTD 2012.

If it is a loss, look at whether it is over $3,000 – the most you could claim before you would need to carry forward some of the loss. If it is under $3,000, then you are probably OK for the year. If it is over, then you probably want to look for some gains to harvest that can be offset by the losses.

If you have a gain, then you should look for losses that you can realize that can offset the gains. This is especially important if the gain you have is short-term in nature. Short-term gains (held for less than one year) are taxed at your normal income tax rate. These are the most important to off-set.

You should look at your unrealized gains and losses and identify some potential gains or losses that you can consider to optimize your tax bill now.

Step 2: Pull the trigger on the right trades to take your gains or losses.

After you have some potential targets for taking gains or losses, you need to ask yourself this question: Are you ready to close this position because you no longer believe in it? Or because you want to harvest the gain/loss for tax reasons?

If you no longer believe in the stock or ETF, then close the position and never look back. This should be a regular exercise for you anyway as a buy-and-hedge investor.

But if the reality is that you still want to hold the stock, then you need to work within the rules for wash-sales to harvest the gain/loss. These rules exist to keep you from selling a position to harvest a loss in the short-term with the purpose of offsetting it against a taxable gain.
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No positions in stocks mentioned.
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