Planning Briefs

If you're an experienced investor, you probably know about the "wash sale" rule for security sales. It means you can't deduct a capital loss from the sale of securities for federal income tax purposes if you buy new shares of "substantially identical" securities within 30 days.

But you may not realize that there's no corresponding rule for capital gains. In other words, you can reap all of the usual tax benefits when you harvest a capital gain at the end of the year, even in a declining market.

Consider today's tax landscape. As the year winds down, you may want to sell stocks in order to harvest capital losses that can offset capital gains you've realized during the year. If your losses exceed your gains, you can use the excess amount to offset up to $3,000 of ordinary income and then carry over any remainder to next year. This can be an especially attractive opportunity if you can reduce the amount of your short-term capital gains that otherwise would be taxed at ordinary income rates reaching up to 39.6%.

If, after the recent market downturn, some of your holdings are worth less than you paid for them, you can take a loss to offset capital gains. But you may not want to offset long-term gains on stocks you've held for more than a year. The maximum tax rate on long-term gains is normally 15% or 20% for those in the top ordinary income tax bracket. A 0% rate applies to long-term gains for investors in the two lowest tax brackets.

And the wash sale rule may hinder you if you believe a particular stock or mutual fund is poised to rebound. You'll normally have to wait at least 31 days after a sale before you buy back the same securities. One way around the rule is to "double up," buying the same securities right away and waiting at least 31 days to sell your original shares.

But there's no such restraint if you're harvesting capital gains rather than losses. You could cash in a long-term gain and buy back the same stock or mutual fund immediately with no tax worries.

For example, suppose you bought a stock three years ago for $10,000. The value increased to $15,000, but now has dropped back to $12,000. However, you're bullish on the stock's future prospects.

Assuming that it otherwise makes sense, you can sell the stock and pocket a $2,000 long-term gain. If you're in the 35% tax bracket or lower, the most you have to pay in capital gains tax is $300 (15% of $2,000). Then you can buy it again and hold the stock until you sell it later at either a gain or a loss. The wash sale rule never comes into play.

Of course, there are other factors to consider in your investment decisions, including a stock's fundamentals. The best approach is to consult your financial advisors concerning all of the tax and investment ramifications of your decisions.