No, this is not about crops. It’s time to harvest your tax losses after the big declines in the stock market. Tax loss harvesting is a silver lining in a terrible year for stocks.
Here’s how it works:
On January 1, 2008 you had mutual funds worth $400,000.
Now they are worth $250,000 for a paper loss of $150,000
To harvest this loss you do the following:
- Sell your mutual funds – now you have a loss for tax purposes of $150,000
- Buy very similar mutual funds with the $150,000 proceeds – your investment strategy is still essentially the same
- After 31 days, sell the new mutual funds and buy back your original funds
With your loss of $150,000 you can do the following:
- Offset any gains you have (one client had substantial from earlier this year from selling individual stock holdings. This strategy will save her over $20,000 in capital gains tax.)
- Offset up to $3,000 per year in income each year until your losses are used up.
- Offset future gains you may have in the future.