A YEAR-END TAX QUESTION FROM A CLIENT

A client sent me the following email message this past Monday morning -

“I have a mutual fund in my CMA account with Merrill Lynch which for the last two years has shown an unrealized loss - this year being $1,264.

Since I have used up all the investment losses on last year's return, is it a good idea for me to sell this fund so I won't be clobbered by Uncle Sap - I mean Uncle Sam?”

Here is my answer –

“My preliminary comment is that your first criteria for any transaction should always be financial.  Taxes are second. 

If you, or your financial advisors, think this investment will increase in the future and eventually generate a gain, or it provides good dividends, you should not sell it just to get a tax loss.”

However, if it is truly a ‘dog’, selling it for a loss before the price goes even lower will generate a small tax savings.  You will receive at least $190 (and possibly up to $316) in tax savings with a $1,264 loss.”

Good advice for anyone with a similar question.

Don’t let the tax tail wag the financial dog.

You cannot sell the investment for a loss and immediately buy it back. That would result in a “wash sale”, which would defeat the purpose of the sale.  You must wait at least a full calendar 30 days before you can buy back the shares – and a lot can happen in those 30 days.

TTFN