---
title: "Should You Sell Stocks in December?"
description: "Should you sell stocks in December? Why end of year portfolio rebalancing may not make sense--especially with capital gains taxes and the January Effect."
canonical_url: https://trendshare.org/how-to-invest/should-you-sell-stocks-in-december
markdown_url: https://trendshare.org/ai/should-you-sell-stocks-in-december.md
published: 2014-10-26
last_updated: 2020-12-14
content_license: https://trendshare.org/about/disclaimer
---
# Should You Sell Stocks in December?
Source: https://trendshare.org/how-to-invest/should-you-sell-stocks-in-december
Updated: 2020-12-14
The stock market tends to go down in late December. Why? The [January Effect](http://www.wikinvest.com/wiki/January_Effect) suggests
that large funds tend to rebalance their portfolios and investors sell
underperforming stocks to take advantage of capital losses at the end of
December.
This may affect *your* stocks—even if you don't sell anything.
This may also be a tactic you can take advantage of.
## Selling Stocks to Take Capital Losses
You must account for taxes when calculating the [annual rate of return](https://trendshare.org/how-to-invest/what-is-a-good-annual-rate-of-return) you want
to achieve. Unless you're investing in a tax-deferred mechanism such as a
401(k) or a post-tax mechanism like a Roth IRA, [you'll pay either a short- or long-term capital gains tax](https://www.investopedia.com/articles/personal-finance/101515/comparing-longterm-vs-shortterm-capital-gain-tax-rates.asp) when you sell
stocks.
At least, you have to pay taxes when you realize a profit within a calendar
year. You don't pay that tax once for each transaction. The tax it covers the
year as a whole, allowing you to [offset profits by selling stocks for a loss](http://www.bankrate.com/finance/taxes/capital-losses-can-help-cut-your-tax-bill). The basic principle is simple: any
losses will offset any gains. In other words, you pay taxes on the *net
capital gains* from stock sales; this is the sum of all profits minus the
sum of all losses of all stock sales. If you make $1000 selling [McDonald's](/stocks/MCD/view) stock and lose $800 selling [Xerox](/stocks/XRX/view) stock, your net capital gains are $200 ($1000
- $800).
It's better to pay taxes on $200 than $1000, right?
This isn't trivial; you have to understand the difference between short-term
and long-term capital gains. Selling stocks at a loss may be beneficial in some
circumstances, but the details depend on your own situation. Consult a tax
professional for specific advice.
## Short Term versus Long Term Capital Gains
In the United States, the IRS considers any capital gains on an equity
you've held for more than a year to be long-term gains. Any gains on an equity
you've held for less than a year (a day, a week, an hour, three hundred and
sixty four days) are short term gains.
The difference between 364 days and 365 days can be stark; if you're in the
highest marginal tax bracket of 37.6%, short term capital gains are taxed at
that rate. Your long term capital gains rate would be a maximum of 20%, almost
half of that.
The lower your marginal income tax rate, the lower your capital gains rate
may be; perhaps 15%, 10%, or even 0%. (It's unlikely to be 0% unless you have
almost no taxable income.)
As you build more wealth, the difference between 20% taxes and 39.6% taxes
grows.
## Tax Loss Harvesting
Because taxes operate on income and capital gains and losses realized during
a calendar year, you can take advantage of changes in the value of your
equities to smooth out your tax liabilities. *Tax loss harvesting* is
the process of selling an equity for a loss then reinvesting the money from the
sale.
Suppose you've found [an undervalued stock](https://trendshare.org/how-to-invest/how-to-pick-good-stocks). You bought it on January 3 for $10,000. It then started to lose
money (and you think that trend will continue). It's [still a good company and undervalued](https://trendshare.org/how-to-invest/what-is-intrinsic-value), but
for the foreseeable future (this tax year), its price isn't going up. Now it's
worth $5,000 and you've been eyeing a better stock candidate.
If you sell that stock for $5,000 and buy something else that will perform
better, you've realized a $5,000 loss and have a chance to put that money
elsewhere. You can use that $5,000 loss to offset $5,000 gains elsewhere (and
avoid paying $750 or $1000 on it).
This technique can be useful, if you keep in mind two rules. First, the
transaction must *settle* by December 31st to apply for the 2020
calendar year. The last day to sell stocks for a tax loss in 2020 is probably
December 28 or 29, if your broker will settle the transaction before December
31. (Things get more complicated if you're waiting for a short sale transaction
to settle.)
The other rule for harvesting tax losses is more complicated....
## The Wash Sale Rule
The [SEC's Wash Sale rule](http://www.sec.gov/answers/wash.htm)
says that if you buy more of the same stock within 30 days of a sale, you
*cannot* apply the losses when calculating your net capital gains or
losses. In other words, buying and selling stock within 30 days has tremendous
implications for your tax position.
If you're selling a stock in December 2020 and buying it again in January,
don't get yourself blindsided for 2021 taxes.
Remember, though: the goal of value investing isn't to minimize capital
gains taxes. It's to build wealth over the long term. Managing your taxes is
*part* of that, but it's far more important to buy great stocks at good
prices and let the market pay you back.
## December Portfolio Rebalancing
If taxes aren't a concern—especially if you're investing in a
non-taxable or not-yet-taxable fashion—does it make sense to rebalance
your portfolio at the end of the year by selling things you're overvalued in
and buying things you're undervalued in?
It depends.
Portfolio rebalancing is a way to reduce your risk by diversifying your
investments. In its most naïve form, you sell your higher performing
stocks and buy more lower performers.
Does it make sense to get rid of the winners and buy more losers? A better
approach is to reduce the amount of your portfolio you have in risky
investments and increase the amount you have in safer investments. It's almost
a cliché: put more in index funds or bonds as you get older.
The time of year when you do this is arbitrary. It doesn't have to be
December. Arguably December is a poor time to do this, as the market's frothy
from people who purposely sell stocks for tax reasons. You can just as easily
[reinvest dividends](https://trendshare.org/how-to-invest/what-is-dividend-reinvesting) from riskier
stocks in safer places—no selling required. Of course, if you have the
bulk of your portfolio in [a good index fund which tracks the S&P 500](https://trendshare.org/how-to-invest/buy-the-s&p-index-fund), rebalancing is rarely an issue.
## Can You Predict December Selloffs?
Can you profit from a trend of stock selloffs in December? It depends. Are
your target stocks going on sale? The January Effect is real enough to have a
name and serious analysis behind it, but can you predict a drop in the [DJIA](https://trendshare.org/how-to-invest/dow-sandp-nasdaq) in general or a specific price reduction for
the right stock you want to buy?
This is a specific case of the general question of [whether value investors should time the market](https://trendshare.org/how-to-invest/should-value-investors-time-the-market). If you're not pursuing a strategy to minimize your tax
year costs, and if you're not watching specific companies for bargains, there's
little point in trying to buy or sell with extra urgency in December. The only
way to make money in the stock market reliably is to buy good companies low,
hold them, and sell high. If you can't find good stocks at good prices, you're
better off waiting. Keep your money in a low-cost index fund.
Timing the market means [predicting the actions of millions of investors is difficult](https://trendshare.org/how-to-invest/what-happened-in-the-stock-market-today). If you have your goals, research, and
plan, stick with it! Don't let the desire to make a few quick bucks in the
short term distract you from your real goal: building long-term wealth in the
stock market. Decembers come and Decembers go. Healthy businesses make money
annually, consistently, over time—they're the stocks you want to own for
decades.