Early 2016 delivered a jolt to many investors, as U.S. equity markets fell 8% in the first four days of trading. Episodes of market volatility continued through February amid uncertain economic data and geopolitical turmoil. These events have likely caused some advisors and clients to wonder if it’s time to cash in on some of the gains accrued during a seven-year bull run.

Every case is unique
Decisions about when to realize capital gains carry many implications – advisors and their clients should make a thorough assessment of the client’s financial goals. A tax professional can provide guidance regarding the tax implications of any capital gains.

Advisors can consider the following five questions as they guide clients through decisions on realizing capital gains:

1. What is the anticipated holding period? Does the client plan to hold the asset for a month, a year, 10 years, or indefinitely?

2. What are the current tax rates? Advisors and their clients should understand what the tax bill would be for specific assets before they decide to realize gains. It is advisable that advisors and their clients consult with a tax professional when considering issues related to taxes. In Harvesting Tax Losses Year Round, Curt Overway, President and Portfolio Manager at Managed Portfolio Advisors® discusses the potential benefits and risks of managing the tax liabilities of investments.

3. Will realizing gains put the client in a higher bracket? Depending on earned income and other factors, realizing gains on investment income could put a client into a higher tax bracket. This has potential to increase the clients’ overall tax obligation. Again, consulting with a tax professional is the best way for a client to determine changes in their tax liabilities.

4. Does the client have some small long-term gains? Selling securities that have experienced a modicum of growth over the long-term can be an opportunity to realize capital gains. A tax professional can provide guidance around tax efficiency and capital gains.

5. Will these investments incur an increase in purchase price? An increase in purchase price, or basis, can occur when an asset is passed down through inheritance. Capital gains calculations consider the asset’s value from the point of inheritance.  For example, if there is a potential for a highly appreciated asset to be passed down, it may make sense to avoid realizing gains through a sale of that asset.

Careful consideration is key
There’s no one-size-fits-all answer for realizing capital gains. By carefully considering these questions and consulting with a tax professional, advisors can help provide clients with a more complete picture of their individual tax picture. More information on investing and portfolio construction is available on durableportfolios.com.


​This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed above may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted.

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