Helping Self-Directed Investors Succeed Blog - Three Tax Strategies for Self-Directed Investors Before 2017 Ends

Three Tax Strategies for Self-Directed Investors Before 2017 Ends

December 25th, 2017

Merry Christmas to our subscribers and readers!

Year 2017 is drawing to a close and we have just 4 trading days left before the New Year Rings! 2017 has undoubtedly been an amazing year for the bulls. It must have been very difficult to lose money investing in stocks unless one had the misfortune of taking positions at the wrong stock at the wrong time. Admittedly, this does happens in raging bull markets for various reasons.

After all is said and done when 2017 is in the bag, it will be time to settle gains and losses and pay one's fair share of taxes. And for self-directed investors there is still some time to minimize the tax bite for the year. Here are 3 important tax strategies that a self-directed investor may want to consider:

  • Employ Tax Los Harvesting
  • Taking a Short-Term Loss
  • Taking a Long-Term Capital Gain

With the Tax Reform for 2018 now in place, tax loss harvesting possibilities can be minimized with the new rules but for 2017 there is still time to employ this strategy to reduce overall capital gains. Tax Loss Harvesting is a strategy that seeks to offset a short/long term capital gain in a position with a short/long term capital loss in a different investment position. This strategy works best when a self-directed investor is holding a stock that's a dud and has lost significant money but fortunately he/she has made a significant gain in a different security which the investor is seeking to sell before the year closes for various reasons. While holding on to a weak security is not a great idea, taking a short term gain is also going to cause the investor to pay higher taxes. In a win-win situation, the investor can sell both the losing and winning positions before year ends and thus come out even without incurring a higher tax. This may not only be a tax strategy but also a capital preservation strategy.

Taking a short-term loss in a position may be better than taking a short term gain as short term capital gains are taxed at a higher rate. Also exiting out of losing positions quickly, especially, when the investor thinks the position could lose more money, can help cut losses and save capital. Also, capital losses can be carried over multiple years and be used to offset gains for the next tax year upto a limit specified by the IRS. Self-directed investors may want to consider this approach if a loss is indeed a reality and has to be taken.

A consistent tax strategy to postpone/convert a potential short term gain to a long term capital gain can significantly reduce the capital gains tax paid. A short term capital gain occurs if a position is sold for a gain within 1 year. Just waiting for a day longer than one year can help in having the gain be considered long term and thus taxed at a lower long term capital gains tax rate.

These strategies, admittedly, are not cookie-cutter strategies that will always work for all self-directed investors as obviously different investors will have different personal circumstances and factors to take note of. Consulting with a Tax Advisor is something a self-directed investor may want to seriously connsider before 2017 becomes history in just a few days.

Good Luck and Happy Investing!

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