2020 will go down as a particularly unusual year. The pandemic brought large market swings, record unemployment and rippled through industries. In one way or another, it has affected how we live and work. Being so unusual and widespread, it is possible that you had changes in your financial circumstances. Perhaps you withdrew more on your portfolio to bridge the gap between jobs, or changed the amount of stocks in your portfolio? This is a great time to make sure your taxes are mitigated before year end. As it relates to investment options, we will point out a few items to pay attention to as the year comes to a close. Namely, year-to-date capital gains, capital gain distributions and loss harvesting.
Year-to-Date Capital Gains
Year-to-date capital gains are in the periphery when considering tax planning at the end of the year. Most people look at their employment income or other sources of regular income. Capital gains are triggered when you sell a stock for a higher price than you bought it. Capital gains are tallied throughout the year against the losses realized in a portfolio. This gives you a fair amount of time to either prepare for a higher tax bill or seek losses in the portfolio to reduce the net gains. Though we strive to satisfy requests in the most tax efficient manner, as your portfolio matures, some gains will be unavoidable.
Capital Gain Distributions
Another area related to taxes is capital gain distributions. This is separate from the gains taken as a result of the sales made in your portfolio. Capital gain distributions are primarily sourced from mutual funds. Mutual fund managers do their own trading to keep their funds balanced. If the trading within the fund ends up with a net gain at the end of the year, they are required to distribute the gains to the investors. The mutual fund investors then pay tax on the distribution unless they have offsetting losses. The managers of the mutual funds announce the distributions towards the end of the year. Once announced, it gives investors time to harvest losses from other positions, avoid buying more of the fund and potentially sell the fund if it is at a loss. RegentAtlantic tracks this for our clients and may make tactical investment decisions based on this information.
You are probably seeing a theme in all of this: sell positions at a loss where possible. The investment world is full of companies and products that have similar return streams. Chances are that your favorite stock has a competitor in the same industry. You could temporarily buy that competitor, sell your favorite stock at a loss and then wait 31 days to buy back your favorite stock. The same goes for mutual funds. There are plenty of funds out there that invest similarly that you could temporarily buy. While we are recommending to harvest losses at year end, remember that loss harvesting is best done throughout the year.
It is a good time before the end of the year to review the realized capital gains in your portfolio, watch out for capital gain distributions and look for opportunities to take losses. As we approach the end of the year, our investment process begins to hone in on the capital gain distributions and look for more opportunities to harvest losses. Take a look at your year-to-date capital gains. If they are substantial, at the very least it will help you prepare for a higher tax bill. At best, you can see if there are losses in your accounts held elsewhere to help offset it completely. Meanwhile, we will continue to seek opportunities to harvest losses. Please keep your advisor apprised of any changes in your financial circumstances.
Important disclosure information
Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.
Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.
This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.
RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.