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Some Things You Need To Know About Tax Loss Selling

Some Things You Need To Know About Tax Loss Selling

In order to reduce the capital gains from other sources, tax loss selling is a simple and straightforward tax strategy. Under this strategy, you tend to sell mutual funds, exchange-traded funds and stocks that cease to retain the value that investors had previously remunerated for them. As per the old saying, buy High, sell Low, tax loss selling do not find this requirement of this saying. It is because in tax loss selling you need to sell you stocks, property (apart from your residential place) and funds at a low price. And in this respect, tax loss selling is only applicable to investments that occur in isolation with RRSP.

How investors benefit from this tax effective strategy

Tax loss selling helps the investors to minimize their existing and present tax bills. It is because, the investors normally after the end of each financial year, the investors review their existing portfolio, along with reviewing them they also rebalance or modify their holdings so that they can be better aligned with the future and can consider something more worthwhile before the end of that financial year.

They decide to sell those holdings that do not give them the value at which they had bought them. Therefore through tax loss selling, they tend to realize the inherent loss the holdings is giving and might give in the future. And with this mindset and strategy, the investors can eventually counterbalance the taxes from profits through other investments and their income.

 If you find a Tax Preparer or a financial adviser, you will realize that he holds the opinion that tax loss selling is an effective tax saving strategy and helps in counterbalancing profits and income. It is because, for certain taxpayer profit tax rates are significantly higher such as 20% coupled with the tax on net income that can be around 3.8%. Thus by tax loss selling, profits from investments are balanced with the envisioned and apparent losses.

Tax loss selling requires certain things to consider

Although the tax loss selling may appear as a simple strategy, it is not without some complexities. So, if you want to make sure that this strategy runs smoothly and give you the tax advantage, then keep in mind certain points:

  • Do not violate the wash sales rules

Once you decide to sell an investment in order to realize its pertinent loss for the purpose of tax, it is necessary that you give a sheer consideration to wash sale rule so that you don’t infringe them. According to the demands of the IRA, a wash sale occurs if you are selling your investment or exchanging a security at a loss. However, given that this investment or security gave you losses over the time, you still want to own them. Here you needs to follow a certain procedure. Thus, a wash sale can only occur if the investor purchases an identical stock or security or obtains a contract to do so within a month before or after the sale.

Keep in mind that you cannot sell the stock or security from your taxable account and then purchase it back through your IRA. As far as EFTs and mutual funds are concerned, the wash sale rule gets even more complex. It is because you are not allowed to sell your mutual funds or EFTs that are incurring losses and purchase the one that tracks the same catalogue.

Have distributions in cash to gain access to tax saving advantage

It is preferable that you decide to have distributions in the form of cash and not consider reinvesting them if you finance your mutual funds in an account that is taxed. It is because if you decide to reinvest them, you will unintentionally infringe the wash sale rule in the sense that you for the purpose of tax, you are realizing a capital loss for the mutual fund. As a result of this violation of the rule, the loss would be rejected for tax purposes that in turn eliminates any form of tax advantages.

In a nutshell, a tax loss selling is just a strategy. So to what extent you use it or whether you actually want to make use of it depends greatly upon your investments goals and extensive financial planning. Nevertheless, if you use this tactic wisely to rebalance your overall portfolio at the end of each financial year, then tax loss selling will be the best way to organize and plan your funds in tax-efficient manner.

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