We are still in the heat of tax season so many people are looking very closely at their investments and the tax consequences associated with those investments. In "normal" years, investors sometimes try to sell investments that are down in order to harvest tax losses. These capital losses are valuable because they can be used to offset capital gains. And, if there are still losses remaining, up to $3,000 in losses can be used to offset ordinary income.
However, this is not a normal year and in 2012, it might make more sense to focus on realizing capital gains instead of harvesting capital losses. That is because this year is supposed to be the last year that the preferential capital gains tax rates of 0% and 15% are in effect. Starting next year, capital gains tax rates are set to increase to 10% and 20%.
So, if you are holding a stock with a low basis, selling the stock this year and recognizing the gain now may be a very smart move. This is expecially true is you are filing a joint tax return and have taxable income of $70,700 or less, or you are single and have a taxable income of $35,350 or less. If you fit those tax demographics, you would qualify for the 0% capital gains tax rate.
As with all things tax-related, selling an investment this year may not be a good idea for other financial reasons. Also, this strategy may not work well for people who have large loss carryforwards. If your personal situation is complicated, it would be best to contact a tax professional and "run the numbers."
Finally, it is possible that the favorable capital gains tax rates will be extended beyond the end of this year. Not many people think that will happen since the government is anxious to start collecting more tax revenue but if the economy does not improve, there may be political reasons to extend the reduced rate for another year. Unfortunately, there is likely to be no definitive guidance on this topic until the very end of the year.