Don't Mess With Taxes

Photo by Karolina Grabowska

I have money in the stock market. When I was a younger investor, I checked my assets a lot. Like almost every day.

Then I realized that was just going to make me crazy(ier), so I shifted to a monthly review of where my holdings were. Now I just check quarterly.

Most of the reason for my reduction in the frequency of my equity evaluations is that I'm at that part of my life where my holdings are pretty much set for my fast-approaching retirement years.

The good news is that the recent market dive, while still annoying, hasn't tanked what the hubby and I have. Neither has it dramatically altered our financial and otherwise plans.

Panic selling: A lot of folks, however, are freaking out. Just like they did in the 2007-09 Great Recession created by the housing bubble.

I know people who back then sold all their stocks. At a loss. They then sat on the cashed-out funds and missed the recovery. By August 2018, the U.S. stock market set a record for the longest-running upswing in its history, replenishing the retirement accounts of workers who stayed invested through bouts of volatility. 

Of course, every personal and financial situation is different. One friend acknowledges that her reactive sales undercut her long-term financial plan, but she's still happy that she limited the emotional toll of watching market gyrations.

That emotional reaction is why some folks are bailing on the Dow and NASDAQ now. This time it's the beating the markets are taking because of inflation.

And that's why this weekend's Saturday Shout Out goes to Mark Hulbert's recent MarketWatch column on stocks and what he calls the inflation illusion.

I'll let you read his piece for the full explanation. However, this comment did jump out at me:

"If higher interest rates were always bad for stocks, then the Fed Model's track record [for which he includes a table] would be superior to that of the earnings yield. It is not…."

Now I'm not a financial advisor, and I'm certainly not telling you to hold or sell. All I am suggesting is that you not make knee-jerk reactions when it comes to your investments.

Again, I go to Hulbert's article. He argues that higher interest rates are not an additional reason, above and beyond the other factors affecting the stock market, why the market should fall.

Taxes, too: Although my Saturday is ticking away, I can't let this discussion go without at least some tax-specific remarks.

First, if you're like me and just watching, not acting on, the dropping market, then we're fine in real life. The markets can roller coaster all they want, but until you actually sell, you don't incur any loss or gain.

If your sold assets that you've held for a long term do manage to produce a gain — it could happen, especially if you hold energy sector stocks that so far have generated record profits in 2022 even amid broad-based market weakness — the tax on that amount is a maximum 20 percent.

For some investors, the capital gains bill could be zero. My earlier blog post looks at the various capital gains rates, and this one has the updated, inflation adjusted 2022 tax year brackets.

If, on the other hand, you sell at a loss but do have other capital gains, you can use the losses to offset those taxable gains. And if you have more losses than gains, you can use up to $3,000 in a tax year to reduce your regular earned income.

Finally, some folks might take advantage of the lower market prices to reset their assets' basis (scroll down to the B section of the ol' blog's tax glossary). This is known as tax loss harvesting. My post on this tax technique has details.

OK, enough money talk. Back to the weekend where the only numbers that matter are the scores of your favorite college and pro sports teams. They are the only things that can drive you madder than your market holdings.

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