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Your portfolio may be in the red, but your tax planning just might be in the green – if you know how to work those losses. Anxiety around the spread of coronavirus, along with recession fears, have sent major stock indexes into a tailspin. The Dow Jones Industrial Average declined by nearly 3,000 points on Monday, despite the Federal Reserve's attempts to provide liquidity and protect the economy. While selling out of the market altogether could hurt your long-term plans, getting rid of a few losers could ultimately improve your tax picture.

It's a strategy known as "tax-loss harvesting," in which you incur losses in a taxable account and prune holdings that have fallen in value. Use these losses to offset capital gains from other appreciated assets that you may have sold. "Tax-loss harvesting is important all the time," said Matthew Kenigsberg, vice president, investment and tax solutions at Fidelity Investments. "In a time like this, there will be more opportunities to engage in tax-loss harvesting, but there are securities that are going up and down all the time – and opportunities from tax-loss harvesting all year round," he said.

Embrace the downside

In order to benefit from tax-loss harvesting, you'll need to realize those losses by selling off those positions. Book the loss by the end of the year, and you can use it to offset any capital gains you realized elsewhere within the portfolio. If your losses exceed your gains, you can apply up to $3,000 a year to offset ordinary income. Remember, when you harvest losses, you'll need to redeploy the cash and buy other investments to maintain your portfolio's allocation. "A portion of clients see it as an opportunity and want to rebalance their portfolios or add money to their accounts to buy stocks," said Michael Goodman, CPA and founder of Wealthstream Advisors in New York. Just make sure you don't run awry of the wash-sale rule.

Avoiding wash sales

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If you sell your investment at a loss and snap up an asset that's substantially identical to it within 30 days before or after the sale, the IRS won't let you claim the loss on your return. This is a wash sale. Wash-sale rules apply to all the accounts in your household. For instance, if you sell a holding in your taxable account but buy it back in your 401(k), you've violated the rule. The same is true if you sell your loser in your brokerage account, and your spouse snaps it up elsewhere.

"The wash-sale rule applies per taxpayer, and a married couple is a taxpayer," said Thomas Neuhoff, CPA at Henry & Peters in Tyler, Texas. "You need to keep up communication between the two." Dollar-cost averaging programs, in which you automatically invest into the market periodically, can also trip up investors. For instance, you sell a losing mutual fund, but you forget to look back into the last 30 days when you were automatically snapping up shares. In that case, you've triggered a wash sale.

Know when to do it

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