Temporary declines in stock market prices become permanent when you sell out of those positions. If a stock or fund loses value, it can benefit you to fight the urge to cut your losses while it's only a loss on paper, because the stock may recover.
A strategy for holding a diverse portfolio (where all instruments are less likely to decline at once) with a view to the long-term is to keep you from missing out on the big recoveries or diluting your returns with needless transaction costs. However, there can be situations where it makes sense to purposely sell investments in a taxable account at a loss. One such situation is call "tax-loss harvesting". Just like the name implies, you "harvest" losses for the purpose of lowering your capital gains tax liability.
Kate Dore, a Certified Financial Planner who writes for CNBC, explains how tax-loss harvesting works. "You can sell declining assets from your brokerage account and use the losses to offset other profits. Once losses exceed gains, you can subtract up to $3,000 per year from regular income."1
With the S&P 500 Index down nearly 20% from its all-time high in January of this year, tax-loss harvesting may seem more attractive right now. But there are some things to consider.
When you're in the 0% bracket, you can sell profitable assets, avoid paying long-term capital gains taxes, and even repurchase the same investments for a "stepped-up basis," which adjusts the purchase price to the current value for lower taxes in the future.
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