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Taxes may not be due until April, but now is the time to decide whether you should do any “tax loss harvesting” to limit the recognition of short-term capital gains which are typically taxed at a higher federal income tax rate than their longer-term brethren.

Tax Loss harvesting cannot restore losses, but it can mitigate them. In short, you can sell Security A at a loss to offset the capital gains tax liability on Security B and lower your personal taxes, if the sales meet certain conditions.

Here are 6 essential tax loss harvesting tips.

1. Don’t wait. You might think you have until the clock ticks midnight on December 31 st to address this situation, but as far as the tax year goes you don’t.

Why? The IRS does not approve of buying and selling an asset simply to lower your taxes. Called the wash-sale rule, a loss will be disallowed if the same asset/security is sold for a loss and re-purchased within 30 days (as you must report on Schedule D of the 1040 tax form). That 30 days can really be a total of 61 days or more in certain cases where you want to reinvest in the same security after declaring a loss: 30 days after the initial purchase date and then another 30 after the date of the sale.

Let’s say you love Microsoft Microsoft (NASDAQ:MSFT) and want to stay in it for the long haul but right now the stock is down substantially from your purchase price. If you bought it more than 30 days ago, you can sell it, otherwise you need to wait for those 30 days to elapse. Then you need to wait 31 days to elapse before you can repurchase it.

However, if you simply want to stay invested in the same sector (say, software and services), you do not need to wait to reinvest the same dollar amount in an equivalent asset. So you could take the proceeds from the Microsoft sale and at any time invest them in Apple Apple (NASDAQ:AAPL) or Google Google (NASDAQ:

GOOG).

2. No limit. There’s no limit on the amount of capital losses that can be applied against capital gains. However, only $3,000 of it can be applied against ordinary income for the tax year with the balance carried forward. That said, the time value of money means that the tax liabilities in the future are less costly than the liabilities you face now.

Tax (Photo credit: 401(K) 2013)

3. Watch movements in multiple taxable accounts. If your tax return filing covers more than one taxable account– think IRAs and joint filing spouses – those are also subject to the wash-sale rule. Tax-deferred IRAs and 401(k) are not.

You need to apply the wash-sale rule across your taxable portfolio. This means if you sell individual holdings of Microsoft you cannot buy another block for your IRA without waiting until 30 days after the sale. It also means that if you have recently purchased a security for your IRA you need to wait the 30 days before selling individual holdings of it.

4. Track transaction costs. Of course buying and selling has its own transactions costs so these need to be balanced with how much you can save in taxes.

5. Effectiveness varies. The effectiveness of tax-loss harvesting can vary depending on the composition of your portfolio. For instance, if you’ve taken a look over your investment portfolio’s performance this year, you likely have registered some gains in equities and may have some losses in fixed income. In such a case, you might consider selling some fixed income assets, as well as any stocks that have dropped substantially.

However, if you are heavily invested in certain sectors, finding offsets might not be so simple. For instance, in 2008-2009 virtually all financial institutions were trading lower and there were no simple substitutions in that space.

6. Leverage volatility. While many investors dread market volatility, you can leverage it for purposes of tax loss harvesting. Measure the gains and losses now, or have your financial advisor do it, and keep an eye out for moves in those securities over the next month or so to time the best spot to make a tactical exit.

The overall goal, of course, is to keep more of what you make. It’s not too late to prepare and take steps to optimize your portfolio for tax efficiency. Then you’ll really have something to toast on New Year’s Eve.