Almost one year ago, on May 5, 2010, an investor bought 200 shares of stock at a price of $60. Today, the latest quote for the stock is $45. This drop of $15 gives her an unrealized short-term loss of $3,000.
Tax loss selling at year-end
Many investors review their portfolios before the end of each year. Because capital losses offset gains, some sell stock at that time to realize losses for the current tax year. In fact, some academic studies credit this practice of selling for part of the so-called January effect.
She may hope that between today and the end of the year, the stock price may rise above $45. Then again, it may not. What is certain is that 10 days from now (May 6, 2010) the basis of the stock will become long-term. If she sells the stock for a loss in December, she will realize a long-term capital loss for the 2011 tax year.
Tax loss harvesting year-round
An earlier post showed the tax savings advantage of a short-term loss relative to a long-term loss. By waiting until December to sell, she will have missed the chance in May to realize a short-term capital loss.
Investors purchase stock at all times of the year. This means that the holding period for stock purchased within the last twelve months will also change from short-term to long-term throughout the year.
By making a habit of taking capital losses in December, an investor risks having a number of long-term capital losses. Taking those losses earlier in the year will help avoid that mistake.