Last Updated: December 5, 2008

Though few and far between, there is at least one silver lining to 2008. Yes, given the declines in the stock market this year, you just might have plenty of opportunities to "harvest" your tax losses before the end of the year.

According to Michael Kitces, CFP^®, editor of The Kitces Report, tax-loss harvesting is the act of realizing paper losses in your taxable accounts such that it offsets any capital gains you have, and reduces your ordinary income by up to $3,000 to the extent your losses exceed your gains.

If you don't want to alter your investment strategy, you might consider buying back the same or a similar investment. Just make sure you know about the wash sale rule before selling or buying any security.

According to Fairmark Press, the wash sale rule prevents you from claiming a loss on a sale of stock if you buy an identical or substantially similar stock within the 30 days before or after the sale. Learn more about wash sales.

To be sure, tax-loss harvesting is not for everyone. But here are some things to consider before realizing any paper losses:

Never let the tax tail wag the investment dog. According to an Ernst & Young release, selling a security should not be primarily tax-motivated. "It must make sense from an investment perspective. Review your investment portfolio carefully, consider the timeframe over which an investment might rebound, and if a repurchase is planned, consider transaction costs and the risk the security will increase in value before repurchase."

Make sure that you can benefit from the loss. According to Ernst & Young, "tax-loss selling only provides current savings if you otherwise expect to have net taxable capital gains for 2008. So review your trades in 2008 to determine if you can use the loss currently."
 
As always, consult with a qualified financial professional before trying this or any other financial planning tip.