If you invest in U.S. stocks, mutual funds, or ETFs, you probably track market movements, follow investment trends, and think strategically about when to buy and sell. But one crucial factor often gets overlooked—taxes.
Taxes can quietly erode your gains, turning what seemed like a smart investment into a costly misstep. The good news? A few smart moves can help you keep more of what you earn.
Selling Too Soon? It Could Cost You
A client called last December, thrilled about a stock sale. “I made a great profit!” he said. But when I asked how long he had held the stock, he hesitated. “Uh, about 10 months. Why?”
Because that decision likely cost him more in taxes.
Let’s break it down. He bought the stock for $50,000, and when it hit $70,000, he cashed out, locking in a $20,000 profit. But since he had owned it for less than a year, his profit was subject to U.S. tax at short-term rates, which are generally higher than long-term rates. Had he waited just two more months, his tax bill could have been lower.
Legendary investor Warren Buffett once said, “The stock market is a device for transferring money from the impatient to the patient.” That applies to taxes, too. The patient investor can benefit from both market growth and tax efficiency.
How a “Losing” Investment Can Lower Your Tax Bill
Most investors hate selling at a loss, but sometimes, losing money can actually help you save on taxes.
A client was frustrated with a stock that had been declining for two years. “I don’t want to sell—it feels like admitting defeat,” she said.
That’s when I explained tax-loss harvesting.
Here’s how it works: Suppose she had another stock that she sold when it was up $25,000, meaning she would owe taxes on that gain. But if she sold her underperforming stock at a $12,000 loss, she could offset part of her taxable gain. Instead of paying taxes on $25,000, she would only owe taxes on $13,000—a meaningful reduction.
Even if she had no gains that year, her losses could be carried forward to future tax years, helping to lower taxable income down the road.
One common mistake? Holding onto losing stocks out of hope rather than logic. While patience can be valuable, cutting losses strategically have the potential to improve tax efficiency.
Your 1099 May Be Wrong—Here’s Why It Matters
A client thought his taxes were straightforward. Every year, he’d send his 1099 form from his brokerage firm to his accountant and move on. But last year, his tax bill was unexpectedly high.
The problem? His 1099 had an error.
One of the most common issues with brokerage tax forms is cost basis errors. If an investor transfers stocks between brokerages, the new firm may not have the original purchase price recorded. That means a 1099 might show a larger taxable gain than what was actually earned, leading to an inflated tax bill.
His tax form reported a $100,000 gain, but when we reviewed his original purchase price, his actual gain was only $35,000. That error could have cost him thousands in unnecessary taxes.
Lesson learned: Always compare your year-end brokerage statement with your 1099 before filing your taxes. A quick review can prevent costly mistakes. This short video, Understanding Capital Gains Tax, provides a more detailed explanation.
Financial Decisions Aren’t Just About You
Taxes don’t just affect individual investors—they can impact an entire household’s financial picture.
A client decided to sell a large stock position to fund a home purchase without going over all the detail with her spouse. The result? Their combined income pushed them into a higher tax bracket, increasing their tax bill—not just on the stock sale, but on other sources of income, too.
This is why financial decisions should be coordinated—not just between spouses, but also with financial professionals. A little planning can help avoid surprises and unnecessary costs. To avoid this kind of problem, check out FinancialDate.com.
Keep More of What You Earn
Nobody wants to overpay in taxes, and the right strategy can help.
- Time your sales strategically to take advantage of lower long-term capital gains rates.
- Use tax-loss harvesting to reduce taxable gains.
- Double-check your 1099 for cost basis errors before filing your taxes.
- Have regular conversations with your spouse and financial advisor to avoid tax surprises.
Tax laws are complicated, and what works for one investor may not work for another. That’s why working with professionals—whether a tax advisor, financial planner, or both—can help you make informed decisions.
Another strategy to consider when managing your investments for tax efficiency is donating appreciated stock instead of cash. This approach may allow you to support causes you care about while potentially reducing your tax burden. Want to learn how it works? Read more in this article on donating appreciated stock.
Douglas Goldstein, CFP® is the Director of Profile Investment Services, Ltd., helping people in Israel open and maintain U.S. brokerage and IRA accounts. Securities offered through Portfolio Resources Group, Inc. Member FINRA, SIPC, MSRB, FSI. The opinions expressed are those of the author and not those of this website, Portfolio Resources Group, Inc. or its affiliates. Nothing in this article is intended to be investment, tax, or legal advice. Information in this article is gathered from sources considered reliable, but we cannot guarantee their accuracy. Past performance is no guarantee of future returns.
