Capital Gains: Six Strategies to Consider

Capital Gains.  We have kind of a love-hate relationship with them. We love them because it means our investments have done well and made us money.

But we hate them when the government comes into the picture and takes some of them away.

So, what can you or your financial advisor do to shift the balance towards the “love” end of the spectrum? Turns out there’s quite a bit.

If you hold an asset for less than a year before selling, the IRS will take more of your gains since the tax rates are higher for short-term gains. On the other hand, the IRS also allows you to offset your gains with losses (both short-term and long-term). These two facts of life allow us to engage in capital gains strategies that will have a positive impact on your bottom line, your after-tax return. Here are six strategies that will help alleviate some of the tax burden from your capital gains.

  • During market downturns, selectively harvest losses that you can use to offset current or future gains.
  • When trading and rebalancing, identify specific tax lots that are most advantageous to sell.
  • Use passive and other strategies with low turnover (selling/buying securities less frequently) to reduce the realization of capital gains, especially short-term gains.  This approach makes sense from an investment perspective in many cases, and the tax advantage is an added benefit.
  • Use tax-managed mutual funds that employ many of the same strategies listed in 1-3.  Tax-managed passive funds provide a double bonus.
  • Place assets that are likely to produce the biggest short-term gains, including stocks associated with high-turnover active strategies, into tax-deferred accounts, like a 401(k).
  • Work closely with your tax professional and financial advisor to ensure your investment and tax lives are in harmony, not at odds.

The current maximum 15% tax rate is scheduled to rise to 20% at the beginning of 2013. While you can never be sure what the tax treatment of capital gains will be in the future, you or your financial advisor CAN always be on the lookout for the best ways to direct those gains to your bottom line.

Hewins Financial Advisors, LLC d/b/a Wipfli Hewins Investment Advisors, LLC (“Hewins”) is an investment advisor registered with the U.S. Securities and Exchange Commission (SEC) under the Investment Advisers Act of 1940. Hewins is a proud affiliate of Wipfli LLP. Information pertaining to Hewins’ advisory operations, services and fees is set forth in Hewins’ current Form ADV Part 2A brochure, copies of which are available upon request at no cost or at www.adviserinfo.sec.gov. The views expressed by the author are the author’s alone and do not necessarily represent the views of Hewins or its affiliates. The information contained in any third-party resource cited herein is not owned or controlled by Hewins, and Hewins does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Hewins of the third party or any of its content or use of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner, investment advisor, attorney or other professional.
Martha Post
Martha Post

CFA | Principal, Chief Operating Officer

Martha Post, CFA, is a Principal and the Chief Operating Officer for Hewins Financial Advisors, based in Redwood City, CA. Martha oversees Hewins' operations and client service activities and also serves as a member of its Investment Committee, with nearly 30 years of experience in investment management, research and analysis.

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Capital Gains: Six Strategies to Consider

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