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How sagging oil stocks can ease your tax bill from Uncle Sam

The S&P 500 (^GSPC) and the Dow Industrials (^DJI) will likely finish the year at or near record levels. Investors tempted to break out the bubbly need to remember Uncle Sam is going to want his cut as well in the form of a capital gains tax. “The big issue right now that our investors face and this is true of most managers is that they have big gains but no losses to take against those gains to reduce their tax bills.” observes Hugh Johnson, chairman, Hugh Johnson Advisors.

For investors who still own energy stocks, selling is a no-brainer to ease the tax bite. Plus, there are lots of names to choose from in the U.S. Oil ETF (USO) which has lost 31% of its value this year. Rather than just dumping the entire group, Johnson is advising clients to take it a step further. “Sell Halliburton (HAL), if that happens to be the name you own and you offset it by reinstating or stating a position in Baker Hughes (BHI), which Halliburton is going to buy or some other company like a Schlumberger (SLB).”

By selling the losers and using the proceeds to restablish a position in the sector likely means  investors won’t miss out when and if energy recovers, according to Johnson.  “That’s the way you preserve your position in energy in case it recovers, but at the same time you sort of harvest a capital loss that you can use against the many gains that you have had from this year.” This strategy could also apply to other sectors.

While tax planning makes sense for many, those investors who chose to sell, then buy and hold energy names, could potentially get burned if the sector racks up more losses in 2015. As of now, that is a very a real possibility. WTI crude oil is sitting at the $63 barrel level, a 32% drop this year and there are few catalysts to stop to the slide.

More from Yahoo Finance:
At last, Main Street could outdo Wall Street in 2015Total global meltdown: Is oil to blame?
Oil's decline could take down Russia & Europe

 

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