Investors may feel there is no end in sight when markets are heading downward. It can be difficult for investors to appreciate a down market could bring anything positive. Keep in mind however that we know down markets do not last forever. The average bear or negative market will only last 1.4 years. But yes, watching investments values go down for 1.4 years can feel like forever.

Individuals are encouraged to remember with risk also brings the upside potential, or the risk wouldn’t have been taken initially.  Here is a simple strategy to turn a  negative into a positive. Please note that this will not work for retirement accounts.

 

Tax Loss Harvesting

Tax loss harvesting is selling a security that has experienced a loss and being able to deduct the tax loss but also reinvesting the money into something similar, or even the same holding, because it’s still forecast to be a winner long term.

This strategy is executed when returns have stumbled due to reaching a contraction in the business cycle, negative news, or just current market conditions. Now your shining star investment seems to be a dud. We’ve all been taught to buy low, sell high. Here is a real-world example of how this would play out.

Bobby works as a technician inside a manufacturing plant. Bobby has a non-retirement brokerage account with his favorite financial advisor, Brad Grimes, in order to “get ahead”. He wants to invest $25,000 into ABC stock. ABC stock is a good company, has been around for 100 years and has a strong track record.  One year later Bobby $25,000 investment is worth $22,000, a net loss of $3,000. Bobby’s financial advisor recommends that Bobby sell his investment to realize the loss and then buy the stock back or a similar stock. This allows Bobby to take a $3000 income tax deduction when he files his tax return. Assuming Bobby is in the 22% tax bracket, his tax savings would be approximately $660.

 

Wash Sale Rule

Not surprisingly, the IRS has a regulations to prevent the immediate sell and repurchase of stock solely for tax benefit. Generally speaking, the Wash Sale Rule requires investors

to not re-purchase the same or “substantially identical” investment for at least 30 days.

 

Need help?

Please call our office and schedule a complimentary no-obligation portfolio review meeting to find out if tax loss harvesting could be an opportunity for you.

The more you learn, the more you earn. 

– Warren Buffett 

Grimes Financial Services, 2 Williams Street, Lexington, North Carolina 27292 Get Directions

Phone: (336)-249-2723, Fax: (336) 249-2727, Email: brad@grimesfinancial.com

Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Cambridge and Grimes Financial Services, Inc. are not affiliated. This communication is strictly intended for individuals residing in the states of AK, AL, AR, CA, FL, GA, LA, MS, NC, OK, SC, TN, TX, and VA. The information being provided is strictly as a courtesy. When you link to any of these web-sites provided herein, Advisor Financial makes no representation as to the completeness or accuracy of information provided at these sites. Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, sites, information and programs made available through this site.

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