It's a good time to wisely prune portfolios to save clients from capital gains taxes, says BMO GAM portfolio manager
If your portfolio has made capital gains this year, you can prune it to decrease the amount of tax you have to pay.
“If you’re up 20% on a stock, or security, that you just sold in your portfolio, and you have a capital gain on that, you’ll have to pay capital gains taxes on that 20% from the stock that you just sold,” Alfred Lee, BMO Global Asset Management’s investment strategist and portfolio manager, told Wealth Professional.
“What a lot of people do to offset that at this time of year is look for securities that are trading at a paper loss in their portfolio. They identify stocks or other securities that are down and sell those. They crystallize the loss and apply that loss against the capital gains in their portfolio. So, they essentially offset, or at least mitigate, a portion of that capital gain tax and reduce the capital gains taxes that they owe.
“It’s a very simple, but very efficient, strategy that investors and advisors can use.”
If the market for the area that you sold in begins to rally after you sell, Lee said many people just reinvest the cash in an ETF to get a broad exposure to the market since there are restrictions to prevent them from reinvesting in that stock for 30 days. Of course, you can also invest the proceeds from the sale in a new area with other stocks.
“A lot of people do this during this time of the year,” said Lee. “And here’s the good thing about it: even if you don’t have capital gains this year, you can crystallize the losses this year and retroactively apply them against your capital gains for three years back.
“The other good thing is that you can also carry them forward indefinitely.”
While many advisors may be aware of this tip, Lee thought it was a good time to remind them.
“As investors, we always focus on the investing part of the equation,” he said, “but the tax management side of the equation is equally as important, and this is one simple strategy that investors and advisors can use in order to mitigate some of the taxes.”
