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Stocks Are Down. Is It Time for Tax-Loss Harvesting?

The stock market has had a rough ride this year. And now, a lot of people are looking at losses in their portfolios.

If your investments are down, you may be wondering if it pays to wait things out and give your portfolio a chance to recover or sell stocks strategically at a loss. Here’s what you need to know.

Tax-loss harvesting could work to your benefit

The point of investing is to make money, not lose money. But sometimes, losses in a portfolio are inevitable. And the good news is that you can use those losses to your benefit.

Capital losses can be used to offset capital gains. And if you don’t have capital gains to cancel out, you can use capital losses to offset a limited amount of income.

Image source: Getty Images.

Should you do some tax-loss harvesting now that stocks are down? It depends.

First, you’ll need to think about whether the stocks you’re looking to sell are likely to recover. It’s important to remember that many stocks are down right now due to a broad market downturn. But if you still believe in those companies, then you may not want to rush to unload them.

Secondly, you’ll need to consider whether you’re looking at capital gains in your portfolio. If you’ve sold stocks at a profit this year or are planning to do so, then you may want to take a strategic loss to cancel out or minimize your tax obligation. But if you aren’t looking at capital gains, then the only benefit you’ll get from selling stocks at a loss this year may be the option to offset up to $3,000 of ordinary income.

If you’re in a higher tax bracket, that could translate to decent savings. But will that savings be enough to compensate for the loss you take in your portfolio? That’s the question you really need to ask yourself.

When will stocks recover?

Some investors may be motivated to sell stocks now before their values plunge even more. And some might need to sell sooner rather than later to free up cash.

But if you’re convinced that your portfolio will recover in time, then your best bet may really be to leave it alone. We don’t know when stocks will recover from this recent bout of turbulence. The reality is that it could take weeks, months, or even years.

As such, you’ll need to consider your investment horizon. If you’re holding stocks to cash out in retirement and that milestone is decades away, you may want to sit tight and wait things out.

What about selling stocks to buy other assets?

If you have a stock in your portfolio that’s lost value and you don’t see it recovering well, you may want to dump it and use your freed-up cash to buy another stock with more potential. Or you may decide to use your sale proceeds to invest in the broad market while it’s down by scooping up exchange-traded funds (ETFs).

There’s nothing wrong with that strategy, either. Ultimately, selling stocks at a loss is a bit of a gamble. But if you take the time to think things though, you might manage to use the current stock market downturn to your financial advantage.

The Motley Fool has a disclosure policy.

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