Postpone your losses
That's right. This is the time of year when tax advisers typically advise "harvesting" your losses, which simply means selling enough stocks that have declined to offset the taxes owed on stocks you've sold at a gain this year and up to $3,000 of ordinary income. That strategy may still make sense — to the extent you have any taxable gains, say, from stock sales early this year. But with stocks having been cut in half this year it's a good bet that you are not staring at a capital gains tax liability just now. So put off selling until next year when, hopefully, the market will begin to recover and you'll stand a decent chance at getting a better price.
Another reason to wait: it's a reasonable bet that the capital gains tax rate will jump next year, though it probably won't happen until late in 2009 at the earliest due to the current economic crisis. On that chance, you might be better off paying any taxes on your gains this year in order to preserve your losses for next year, when those losses may be more valuable from a tax perspective. "Over the long haul you should have more gains than losses — or it doesn't make sense to invest," says William Jordan, president of Sentinel Group, a financial planner in Laguna Hills, Calif. "So you'll get the chance to use your losses." The choice, he says, is to pay a relatively low tax now, or a higher one later.