Taking Tax Losses

Taking tax losses in mutual funds is a no cost transaction that saves you money on your taxes. If the cost basis (the amount originally invested plus the reinvested capital gains and dividends) in a particular fund is greater than its current value, you have a paper loss.

In order to reduce your taxes, this paper loss must be converted to a realized tax loss. This is done at no cost to you by exchanging the funds with a paper loss to other funds within the same fund family.

A capital loss can be used to offset any capital gains. If you have no capital gains, $3000 may be used to offset ordinary income. Capital losses also carry forward to subsequent tax years until they are completely used.

Consequently, you may not have any capital gains for 3 to 5 years.

Remember, these tax losses are not available for retirement accounts or variable annuities.