As the end of the year approaches, investors who own stocks
that have fallen dramatically during 2012 are faced with the
usual dilemma: Should they take their lumps and sell their shares
at a loss, or should they hang on, hoping for a rebound?
reward you get from tax-loss selling
creates an extra downward push in November and December for
beaten-down shares, offering an interesting buying opportunity
for those who believe their long-term prospects are better than
most of their peers think.
But thanks to an unusual situation this year, the tax-loss
selling phenomenon may not take shape in the same way it usually
does. As a result, with selling potentially deferred into 2013,
you may not want to count on losing stocks bottoming out before
the end of the year.
Why the usual rules don't apply
Most of the time, investors don't think much about taxes until
the end of the year. Then, they make a mad rush to try to
minimize their income and take advantage of any deductions they
can find. One popular such deduction is taking capital losses on
investments, which is also known as tax-loss harvesting.
Using this strategy, investors would sell already-crushed
stocks, and as a result,
opportunities would typically arise among the
of the market. For instance, the tech sector has a huge divide
between haves and have-nots, with successful businesses finding
ways to transition toward newer technology. Yet
(Nasdaq: DELL) ,
Research In Motion
(Nasdaq: RIMM) , and
) have thus far been
largely left behind by technological
, and their falling share prices have reflected a lack of
confidence among investors that they'll be able to find their way
out of their downward spirals toward recovery. Similarly, coal
stocks have gotten crushed due to low natural gas prices and
industrial slowdowns around the world, with
) seeing especially big losses.
All of these stocks face challenges going forward. Yet because
sellers want those losses, those willing to take the other side
of their trades can often get amazing bargains that can pay off
strongly when the selling pressure eases at the beginning of the
What's different this year, though, is that many investors
aren't interested in taking losses during 2012. Because
higher tax rates are slated to take effect
beginning in January, investors are in the unusual position of
wanting to preserve losses for use in 2013 and beyond, when
they'll potentially be worth more in tax savings.
Extending the downturn
One area where tax-loss selling probably won't have a big impact
is among major institutional investors like mutual funds. That's
because many funds are still sitting on substantial capital
losses that they suffered during the 2008 bear market. Although
stocks have rebounded sharply since that time, many funds have
been able to offset any profits they've earned on those gains
with losses they've carried forward since then.
But among individual investors, when to take losses could have
a huge impact. If higher tax rates are allowed to take effect,
then it could push tax-loss selling past the end of the year into
January at the earliest. And if investors do what they normally
do and procrastinate until the last possible moment, it could
push tax-loss selling toward the
On the other hand, it's possible that lawmakers could break
their current logjam and extend current tax breaks, either in
whole or in part. If that happens, then you could see some major
moves on the tax-loss selling front, presenting the more typical
opportunity for bottom-fishing.
Wait and see
As with so many other things, the result of the election will
play a big role in what happens to taxes after the end of 2012.
Keeping your eyes open will put you in a better position to take
advantage of what comes. Check out our free report: "These Stocks
Could Skyrocket After the 2012 Presidential Election" and
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Fool contributor Dan Caplinger has no positions in the stocks
mentioned above. You can follow him on Twitter @DanCaplinger. The
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