In the aftermath of a stock market crash as the result of an unexpected and unprecedented global crisis like coronavirus, investors are likely to feel anxiety about their investments. In many cases, investors will not see adequate returns on their investments due to the volatile nature of the markets, and this can cause financial stress. While there is certainly cause for concern, the bright side is that investors can actually take advantage of their loss in a practice known as tax loss harvesting, thereby improving the amount they can receive from their taxes.
Since the national deadline for filing your tax returns has been extended until July, this is a great opportunity to audit your investment portfolio and determine how you can benefit from tax-loss harvesting during these chaotic times.
What Is It?
For many investors, the practice of tax-loss harvesting is a common one, typically taken at the end of the calendar year, that is used to improve the composition of an investment portfolio and improve tax returns. Put simply, tax-loss harvesting entails selling securities that have unrealized losses and replacing them with similar assets.This holds equally true in the fixed income market. It takes changing two of three characteristics in the debt world: maturity, coupon (stated rate of interest) and issuer. Most good tax swaps in the fixed income markets come from avoiding a decrease in credit quality.
How to Employ This Strategy Now
The impact of coronavirus has already been significant, and while there may be a lasting economic influence on the markets, now is still a good time to take advantage of tax-loss harvesting to minimize the effects of stocks that have not been productive in generating returns. It is advised that investors do not completely remove themselves from the markets; doing so will undoubtedly hurt any long-term financial plans. However, auditing your portfolio to determine where you can cut losses and seek out similar but more suitable alternatives is a productive practice.
One important thing to keep in mind is that it is ill-advised to sell off losing assets and immediately invest in a similar one for the purpose of reallocation. In order to claim the losses on your tax return, the IRS requires investors to wait for at least 30 days before investing in a replacement asset. Failing to wait the required amount of time results in a wash-sale. It is especially important to remember this 30-day rule when dealing with dollar-cost investments which automatically invest your money into the markets, as these automated processes could inadvertently result in a wash-sale, as well.