As we approach the end of the year, it’s the perfect time to think about strategies that can help reduce your tax bill, and one of those tools is loss harvesting, or loss trading. In my latest video, talk about what loss harvesting is, and three traps to watch out for if you plan to use this strategy. Whether you’re looking to optimize your investments or gain a clearer picture of your tax options, this is a strategy that’s worth considering before the year wraps up.
Loss trading or loss harvesting. The basic idea is that you may have incurred some capital gains through the year, and whether we’re talking a calendar year or a fiscal year, for example, for your company, how to reduce that tax somewhat.
I’m George Dube, saving the world from tax one bow tie at a time®.
By selling off some accrued losses, you can set those losses against the capital gains. There are some tricks, however, rather some traps.
Loss harvesting can reduce your capital dividend account balance
One, the capital dividend account for your corporation. If you’re trying to pay out a tax free amount, triggering those losses will reduce your capital dividend account balance. That means there’s less tax free money for you to take out of your company.
Superficial loss rules
Secondly, the superficial loss rules. Essentially, the government says something to the effect of you or an affiliated person who acquires the same stock that you just tried to sell for a loss within 30 days will not be able to realize that loss. The loss is going to be attached effectively to the shares or the mutual fund or whatever we’re speaking of. Now, some interesting tax possibilities exist in planning for that, but still watch out for those rules.
Timing of trades
And lastly, watch out for when you actually make the trade. Get it in in time. So in other words, if you’re trying to do a trade on December 31st, your trade date and settlement date are unlikely to be realized before the end of the year. The same applies with the physical year. If we’re talking the end of the month, watch out. Do it a few days in advance for December. I recommend doing it before the Christmas holidays.
Be safe, safe, get your loss. But if you are loss harvesting, talk with your advisor to make sure you don’t get tripped up in one of the little side rules.
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Resources
For additional resources related to the year-end activities such as loss harvesting, see:
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Remember – circumstances are unique! This information is summary in nature. Seek out advice from your tax advisor about your specific situation.
