Using Options to Invest Tax-Efficiently
By: Steve Smith
With 2019 drawing towards a close it’s time investors need to look at their portfolios for rebalancing and determining asset allocation. While it should never be the driver of investment decisions one needs to always keep an eye on tax implications as they can have a significant impact on the final total returns.
Typically, at year-end you’ll see some profit taking in winners to reduce exposure in names that have become a much larger percentage of the portfolio through price appreciation. This is often accompanied by the selling of losers; sometimes simply because the investment was deemed ‘wrong” but often driven by tax decisions.
This is known as tax loss selling, in which the losses from one investment can be used to offset the gains in another. This may be especially important this year as so many stocks have such substantial gains.
In tax loss selling occurs when an investors notice they are in a losing position at the end of a tax year, they close that position at or near the end of the year. Second, the sale allows them to take a loss that they can legally claim on their tax returns as a reduction of their earnings for that year. In this way the pay a smaller amount of taxes. Third, after the new year begins, the investor will look to purchase the security at or below the price they sold previously.
But the wash sale rule states that in order for the loss to be allowed one cannot purchase a “substantially identical stock or security” within 30 days of the sale. So, if you want to take a loss in 2019 and be able to repurchase the shares on January 2st the last day to do so and avoid the wash sale would December 1st.
This rule makes some people reluctant to sell out losers in which they have strong and long held conviction on fear they will be missing a turning point.
Think about the end of 2018 with stocks tumbling sharply through November and December. If people…
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