How to minimize long term cap gains taxes when rebalancing annually?

Question

Is there a way to minimize my tax exposure when I annually rebalance my portfolio?

Answer 1

Short of doing this within a tax-free/tax-deferred "mechanism" (e.g., IRA), there's not much you can do. Rebalancing implies selling, which implies realizing gains.

However... you ask about LONG TERM capital gains. You want to maximize the percentage of your gains that are long term, versus short term.

If you're looking to reduce taxes, look to put the money into an IRA, if you can. Other than that, hold everything at least a year (to move from ST to LT) and pay your taxes each year. That way, when you do use the money, you won't have a sudden tax bill.

Answer 2

It depends on your portfolio and how you rebalance.

If you have multiple purchases at different prices of a security you are selling, and assuming you are only selling part of your holding in the security, you can specify which lot you are selling. By specifying the lot with the highest purchase price you can reduce the realized profit which in turn lowers your tax bite.

I suggest you go through the information on capital gains and losses at

http://www.fairmark.com/capgain/index.htm

paying particular attention to the "Capital Gains Planning" page.