No one likes to see their investments go down in value. But, volatility can help you with your taxes. It’s all about balancing gains and losses. 

I need to add a disclaimer – if you’re going to execute any complicated tax strategies -please work with your Certified Financial Planner and your tax specialist to ensure that you can take best advantage of tax opportunities. A wrong move could be costly and/or trigger more taxes.

Whenever we sell an investment -like a stock or a mutual fund, there will be a gain or a loss. We buy a stock for $5 and sell it for $10, we have a $5 capital gain. Uncle SAM will want us to pay taxes on that $5 gain. And, for tax purposes, there are two types of capital gains: Long-Term and Short-Term.

Short-Term gains are from stocks held for less than a year before selling. A Short-Term gain is taxed at your income tax rate. A Long-Term capital gain occurs when we sell our stock after holding it for more than a year. They have a sliding tax rate of 0, 15% or 20%, depending upon your income. Long-Term capital gains are often less ‘taxing’ if you’re in a high tax bracket.

Pitting gains against losses could reduce taxes. Let’s say that we sold a stock that lost $2 a share. We can net that against the stock that made $5 a share – and then we’ll only pay taxes on the $3 net gain.

Long-Term losses will net against Long-Term gains. Then, Short-Term losses against Short-Term gains. If we end up with an overall Long-Term loss and a Short-Term gain – The IRS allows us to net them together. And in this case we would reduce the Short-Term gain by the amount of the Long-Term loss.

It’s complicated. Reading it slowly, it really makes sense. Sometimes it helps to intentionally sell for losses, to reduce taxes on gains.

Questions?