Selling Investments? 4 Ways To Reduce Your Tax Bill

If you have investments of any size, amount, or type, you know that minimizing the tax bill when receiving money from these is key to getting what you deserve from your portfolio. 

How can the average investor minimize their tax bite when selling investments at a profit? Here are a few key methods that anyone can use.

Learn About Your Basis

"Basis" is the accounting term for what you have invested in an asset, and it is deducted from profits. Therefore, the higher your basis is, the lower your tax bill will be. 

For some investments, the basis only includes the cost of purchasing the item. But be sure you account for and document all includable expenses, such as taxes, fees, costs of improvements, legal matters, shipping, and major component replacement.

Harvest Losses

Loss harvesting helps offset profits from the sale of assets. To accomplish this, take a look towards the end of the year at the performance of all your individual investments. Are there any consistent losers that aren't likely to recover any time soon? If you sell these at a loss, you can use that loss to reduce the overall profits on other, better sales.

Sell Long-Term

Capital investments are generally of two types for tax purposes: long-term and short-term. Long-term assets (those held for longer than one year) that are sold at a profit are taxed at a lower rate than short-term assets.

If you have the choice in how to sell different investments, you nearly always do better selling a long-term asset and leaving the newer one for later.

Project Effects

Before you decide to sell an investment or keep it, talk with your accountant about what your projected taxes look like for the current and future year. While projections are always estimates, they do give you an idea of what to expect. Once you know how your taxes are likely to be, you can create different scenarios of asset sales to see the effects of each.

You may find, for instance, that you can reduce the current year's taxable compensation by delaying a bonus or negotiating different benefits. With a lower income, your tax rate is lower, and your capital gains tax rate is also reduced. 

There are other ways to improve tax planning for investments, of course. And the more you do, the better your tax outcome will be. To learn about ways to plan for your particular circumstances, consult with a professional tax planning service in your area.