In the midst of the current market turmoil you’ve continued to counsel your clients to stay invested for the long term because even these conditions will eventually pass.
Still you know, market downturns can provide planning opportunities to take advantage of losses and offset other capital gains.
As a result of fund distributions due to internal rebalancing or your client’s own decision to dispose of some investments, capital gains may have been realized in the current year. Those gains could be neutralized by making dispositions designed to crystallize sufficient offsetting capital losses, with any excess carried back to recover capital gains related taxes paid in the last three years, or perhaps set the stage to carry forward in anticipation of future gains.
But what happened to staying invested for the long term? So long as the business fundamentals underlying your portfolio construction remain valid, these broader market movements should not completely invalidate well considered past choices.
If you re-acquire those same funds within 30 days though, those capital losses cannot offset the gains due to the superficial loss rules. Particularly with the wild market swings we’ve experienced, stepping out of the market for 24 hours – let alone 30 days – may mean missing a large part of the recovery.
Part of the answer may be to employ fund switches not exposed to the superficial loss rules. Specifically, if you are disposing of mutual fund trust units, you could immediately acquire shares of a mutual fund corporation with the same or similar holdings. And it works the other way too if you want to dispose of fund shares to acquire fund units.
By the way, be ready to counsel your clients on what to do with the newfound cash recovered from those past paid taxes.