The U.S. market gained more than 25% for the year to date through mid-December 2024. That’s a healthy showing by any measure. It doesn’t seem like it would be a market environment that’s conducive to tax-loss selling.
But unless your strategy is to buy only U.S. stocks, you may indeed have opportunities to realize tax losses in your portfolio, which you can use to offset gains elsewhere. That’s because other market segments haven’t performed nearly as well.
Must-knows about tax-loss selling
It’s important to note that tax-loss selling is only a worthwhile strategy if you have taxable accounts. To benefit from a tax loss that in turn can help you save on taxes, you need to find holdings in your taxable portfolio that are trading below your cost basis — your purchase price adjusted upward to account for any commissions that you paid along with reinvested dividend and capital gains distributions.
There are different methods for determining cost basis. The specific share identification method for cost-basis elections provides the most opportunities for tax-loss selling or gain harvesting because it allows you to cherry-pick specific lots of a security to sell. But it’s important to note that the average cost basis is usually the cost-basis election default for mutual funds, while the default cost basis election for individual stocks is often first in, first out. In other words, unless you select a different cost-basis election before selling, your investment firm will report your loss or gain using the default.
If you sell securities and your sale price is lower than your cost basis, you have a capital loss. That loss, in turn, can help offset taxable gains elsewhere in your portfolio. (With many mutual funds again poised to make big capital gains distributions in 2024, those losses could come in handy.) If you don’t have any gains in the year you realize the losses or your losses exceed your gains, you can use the losses to offset up to $3,000 in ordinary income. Unused losses can be carried forward indefinitely and applied against future taxable gains.
Where to look for tax-loss sale candidates
As 2024 winds down, here are some of the most fruitful spots to look for tax-loss candidates.
Long-term bond funds and ETFs: Despite the Federal Reserve’s interest-rate cuts, many bond funds are still in the red over the past year and over the past three years as well. Long-term bonds and bond funds look especially ripe for tax-loss selling. Losses in intermediate-term bonds haven’t been as deep — 2% annualized losses over the past three years — but still could add up to a decent-sized loss if your position size is large. Moreover, tax-loss selling may provide a hook to improve your total portfolio’s asset location, in that fixed-income holdings are often best situated in tax-sheltered accounts rather than taxable ones. With yields surging, being smart about asset placement now matters more than it did when yields were exceptionally low.