The US market is up more than 25% year-to-date through mid-December 2024. This is a healthy result no matter how you look at it. I don't think the market environment is conducive to tax-loss selling.
But unless your strategy is to buy only U.S. stocks, there may be a real opportunity to realize tax losses in your portfolio. You can use that to offset profits elsewhere. That's because other market segments aren't performing as well.
What you need to know about tax-loss sales
It is important to note that selling at a tax loss is only a worthwhile strategy if you have a taxable account. To take advantage of tax-saving losses, you need to find holdings in your taxable portfolio that are trading below their cost basis. The purchase price has been adjusted upward to account for fees paid along with reinvested dividends. and distribution of capital gains.
There are various ways to determine the cost basis. The specific stock identification method for cost-based selection provides the greatest opportunity for tax-loss sales or profit harvesting because it allows you to cherry-pick specific lots of securities for sale. However, it is important to note that the average cost basis is typically the default cost-based selection for mutual funds, whereas the default cost-based selection for individual stocks is often first-in, first-out. is. In other words, unless you choose a different cost-based election before selling, the investment company will use the default to report gains and losses.
If you sell a security and the sale price is less than its cost basis, you will incur a capital loss. That loss helps offset taxable gains elsewhere in your portfolio. (These losses may come in handy, as many mutual funds are poised to make large capital gain distributions again in 2024.) There may be no gains in the year you notice the loss, or the loss may turn into a profit. If you do, the loss will be offset by up to $3,000 in ordinary income. Unused losses can be carried forward indefinitely and applied to future taxable income.
Where to look for candidates to sell your loss
As 2024 comes to a close, here are some of the most profitable spots to search for tax-saving candidates.
Long-term bond funds and ETFs: Despite the Federal Reserve's rate cuts, many bond funds have still been in the red over the past year and the past three years. Long-term bonds and bond funds appear particularly ripe for tax-loss selling. Losses on intermediate-term bonds are modest, with losses of 2% per year over the past three years, but still, if the size of the position is large, the losses can add up to a significant amount. Additionally, since bond holdings are often best placed in tax-sheltered accounts rather than taxable accounts, tax-loss sales can be a hook to improve overall portfolio asset position. Now that yields are skyrocketing, it's more important to position your assets wisely than when yields were unusually low.
