The Bogleheads' Guide to Investing

by Mel Lindauer

Keep turnover low. We know that buying and selling funds in a taxable account generates capital gains taxes. Therefore, we will try to buy funds that can be held “forever.” Use only tax-efficient funds in taxable accounts. We will try to use only tax-efficient funds in our taxable account(s). This usually means low-turnover index and/or tax-managed funds. Avoid short-term gains. We know that short-term gains are taxed at about twice the rate of long-term gains. Therefore, we will try to hold profitable shares for more than 12 months before selling. Buy fund shares after the distribution date. Mutual funds pay taxable distributions at least annually. If we buy a fund shortly before a distribution date, we will have to pay taxes on the distribution. If we wait until after the distribution date, the value of our purchase will still be the same (assuming no market change), but we will avoid the tax on the distribution. Sell fund shares before the distribution date. There may be a small advantage in selling before the distribution date. Sell profitable shares after the new year. If shares are sold in December, the tax will be due with that year’s return. By simply waiting until January to sell, the tax will be reported a year later. There’s usually no sense in paying taxes any earlier than we have to. Harvest tax losses. This is the practice of selling losing securities in taxable accounts for the purpose of obtaining tax losses to reduce current and future income taxes.