Investors, have you ever noticed that even in the best of times, not every one of your investments will be a winner?  The reality is that everyone, even Warren Buffet, has some losses.  Investment losses are inevitable.  But they do present an opportunity to lower your tax liability and improve your investment portfolio.  Here are a few important comments to consider as you address investment losses.

 Take Advantage of Capital Losses

Simply put, a capital loss occurs when an investment security is sold for less than the original purchase price.  Capital losses can be used to offset capital gains on your tax return, as long as the loss sale occurs in a taxable account.

In addition, up to $3,000 can be used to reduce your taxable income (up to $1,500 each for married persons filing separately) if capital losses exceed capital gains in any year.   Any losses not used over the maximum are available for use in future years.

Beware of the Wash Sale Rule

Another issue an investor must consider is the Wash Sale Rule.  What is it?  Well, the Wash Sale Rule says if you sell a security at a loss and buy the same or "substantially identical" security within 30 days, the loss is typically disallowed for current income tax purposes.

Remember this when you decide to sell a stock or mutual fund to take a tax loss, but plan to buy it again because you want it in your portfolio. If you buy the investment within 30 days your loss is disallowed for income tax purposes.

As much as you might want the tax loss, you may not want to be out of the market for an entire month just so you can avoid the Wash Sale Rule.  Fortunately, you have an option. You could take the loss and immediately replace the investment sold with a similar (but not "substantially identical") investment that suits your asset allocation and long-term investment plan.

This strategy allows you to sell the investments in question and use the proceeds to be reinvested in more suitable, better-rated and/or more tax-efficient securities in the same asset class. Thus, you recognize the loss for tax purposes and enhance your investment portfolio.

For more information about tax-saving techniques, contact our tax team.