Market downturns aren't much fun, but recent research suggests tax-loss harvesting boosts after-tax returns significantly. Therefore tax-loss harvesting should be part of every taxable investor's plan.

 

You can simply sell a loser and take capital losses to offset gains and restructure your portfolio.

 

Alternatively, you can use a "tax swap" to sell one security at a loss, then buy a similar but not "substantially identical" replacement. The swap leaves your portfolio looking the same -- but lets you claim a deduction for the loss on your original asset.

 

You can use swaps with individual stocks, bonds, and mutual funds. For example, you can swap one stock for another stock, one municipal bond for another municipal bond, or even one busted mortgage-backed collateralized debt obligation for another. You can use short-term and long-term losses to offset unlimited gains, and then, if losses exceed gains, you can deduct up to $3,000 more per year against ordinary income ($1,500 for separate filers).

  

Example:

On January 3, you buy 100 shares of the Starsky Growth Fund at $100 each.

On August 25, those shares are worth $80 each.

You sell to realize $2,000 in losses, 

then reinvest the remaining $8,000 in proceeds in the Hutch Growth Fund.

 

We will be glad to talk to you about a tax strategy.