Every November and December, investors are advised to take losses on securities such as stocks and stock funds. However, this strategy can be implemented throughout the year.
One approach is to sell whenever you have a loss of 10 percent or more. Say you buy 100 shares of a stock at $50 a share. If the company reports poor earnings and the stock drops to $45, sell the shares. Now you have a $500 capital loss. (You can reinvest the $4,500 proceeds in another stock or you can wait 31 days and then buy back the stock you’ve sold.)
At the end of each year, you’ll tally all your gains and losses. Net capital losses up to $3,000 can be deducted from other income, providing immediate tax savings.
Excess net capital losses can be carried forward indefinitely. By harvesting losses in these manners, you may wind up with thousands of dollars of accumulated losses. Then you can take capital gains whenever your investment plan calls for a sale, using those losses to offset gains and reduce or eliminate your tax bill.
