The end of the year is just days away and the financial decisions we make this week impact our tax scenarios for 2016. With that said, the scaredycat wants to know how to harvest tax losses and protect gains made this year.

Tax Loss Selling

Though we wish it we’re the case – all our investments don’t make money. Stock and bond prices can and do go down sometimes.
However, the plus side to it is we can use those losses to offset capital gains or just reduce our overall tax burden on a whole.

Rules to Know

Wash Sale

This means if you sell a stock to take the loss and wish to get back in it you must wait till the 31st day from your sale date to repurchase it. If we buy it back sooner than it will be considered a wash and you do not get to use the tax loss.

Furthermore, if you have not owned a stock for 30 days already you would have to wait until 30 days passes to sell it and then till the 31st day from the sale date to repurchase it if you want to be eligible for the tax loss.

In Layman’s terms - any stock you bought in December that is down you will not be able to take a tax loss on if you plan to repurchase it. If you just plan to cut your losses and get out of the stock for good that’s a different story, but for repurchases only focus on stock you bought by the end of November.

Max Loss Deduction

The cap on capital losses is 3k. That’s the highest amount you can claim in a given tax year, anymore carries over into the next year.

However, the amount of losses you can take against capital gains is unlimited.

Example - You make 10k on a high flying tech stock, but you also lost 8k on a pharmaceutical stock. If you sell both that your capital gain is only 2k as the full 8k is allowed to be used against your capital gain.

Protecting Profits without Taking the Gain

Let’s say you have some nice profits on a handful of stocks, but you do not want to take the gain in 2016 or you are just not ready to sell them.

How do we protect those profits that we are not ready to realize by selling?

We Do So By Buying Insurance
Insurance? For stocks? Wait, what is that?

If you have ever watched any of the financial news stations the word “options” has probably come across your radar. Well, options are basically insurance.

When we want to insure against the down side we would purchase a PUT option.

A put option goes up in value when the price of the stock it tracks goes down.

Example - We own a basket of stocks that have had quite a nice run higher. We are not ready to book those profits in 2016, however we want to protect those profits over the next week or two before selling in the new year.

In a case like this we can buy a put on the overall market, such as the S&P 500 ETF (SPY). Options have expiration dates for each month (any various other times frames). So we would purchase the JAN 2017 puts on SPY. If the market goes down and likely your basket of stocks as well, then the value of the PUT option goes up, thus offsetting a good portion of your basket of stock’s decline.

Note: there is something called the “strike price” when it comes to options. That is the price at which the option can be exercised.

Basically it’s the point at which the option has value or does not come the expiration date.

Let’s say we buy a put on SPY with a strike price of 225 with a January expiration (which is the 3rd Friday of the month). Any amount that SPY is below 225 is what the PUT would be worth. If it’s at 225 or above it will be worthless come expiration and will me the market is higher and most likely your basket of stocks is too.

So again - it’s basically like buying insurance for your basket of stocks.

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Regards,

Thanks for pic pixabay
DISCLAIMER: All info in this post is for educational value and only my opinion - consult a tax professional.