What Is Tax Selling?

Tax selling is selling the underperforming stocks or options in your portfolio at a loss to offset any capital gains - or profits on the portfolio - you have made during the year.

You can report capital losses on Schedule D to reduce the taxes you have to pay. You can use $3,000 of your capital losses per year to offset any capital gains and reduce your taxable income. Any amount in excess of that $3,000 can carry forward into subsequent years until it is used up.

But beware of the wash sale rule. It prevents you, for 30 calendar days after you've sold a security for the tax loss, from repurchasing the same security or a “substantially identical” one. You can buy the security back on the 31st day after the sale, however.

The wash sale rule also applies to the 30-day period before you sell a stock to prevent investors from buying twice as much stock as they want and selling half of it for tax benefits.