Tax Breaks for Your Investment Losses

by Stacy Francis, CFP®, CDFA

My girlfriend called me up last night. “So,” she told me, “I was seconds away from selling these bonds I have so that at least I’d get a tax write-off, when I realized that’s not how it works with bonds. If I hold them until maturity, I will get my money back, won’t I?” I was so proud of her! She remembered! A major difference between stocks and bonds is just that – bonds have a maturity date, while stocks don’t. This is part of the reason bonds are considered “safer” investments. 

If my friend had owned stocks, her thinking would have been very strategic. Many investors sell stocks that are down just before the end of the year, and use the capital loss to lower their tax bills. This is a great idea for stocks, but does not work as well with bonds. 

In the case of mutual funds, things get a tad bit more complicated – or complex, perhaps. The fund managers buy and sell securities now and then, and unless you keep a very close eye on the fund, you will be notified via mail whether you are entitled to a tax write-off or owe the IRS money. Since the fund managers may have bought securities several years ago and sold them during the past year, it is possible that you will have a taxable capital gain even when your fund is down. Conversely, it is also possible that you will be able to do a tax write-off even though your fund is up.

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