Ask Yourself These 3 Questions Before Selling an Investment in Your Brokerage Account

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  • There may come a time when you're tempted to sell off an investment. 
  • Before you do, make sure you're doing so for the right reasons.
  • It helps to ask if the market itself is down, whether the company could recover, and what the tax implications of selling might be for you. 

Think through each one carefully before making a move.

Just as you might change your mind about liking a TV show or movie, you might also one day decide a given investment in your brokerage account is no longer worth hanging onto. But selling off investments could have different financial consequences, so it's important to think things through carefully. Here are a few key questions to answer before making that sort of call.

1. Is the broad market down?

You may be inclined to sell off a stock when it's down so you minimize your losses. But before you rush to do that, consider the state of the stock market as a whole. If the broad market is down, it may be that the stock you're unhappy with is down due to general turbulence -- not because there's a problem with the underlying business. And if you choose to wait things out in that scenario, you may find that you're able to avoid selling at a loss. 

2. Is the company likely to recover?

You may have a stock in your brokerage account that's been losing value since you acquired it. If that's the case, you'll need to think about your chances of having it regain the value it's shed. Perhaps since buying a given stock, the company in question has consistently reported poor earnings or faced other setbacks that have impacted its bottom line. If that's the case, and you're sitting on a stock that's unlikely to recover, then you may want to unload it before its value drops even more.

3. How will this impact my taxes?

Selling an investment in your brokerage account doesn't automatically mean taking a loss. In some cases, it could mean making money. That's a good thing -- but you'll need to be mindful of the tax implications of selling a stock at a profit.

When you sell a stock at a price that's higher than what you paid for it, you're liable for capital gains taxes. Now, the amount of those taxes will hinge on how long you held your stock prior to selling it. But either way, be aware that capital gains will likely raise your tax burden in one way or another. 

Of course, it may be that you're looking at selling a stock at a loss. That's a bummer -- but it could benefit you tax-wise. Capital losses can be used to offset capital gains in your brokerage account. And if you don't have capital gains, you can use a capital loss to offset up to $3,000 of ordinary income per year. If your earnings have increased and you're worried about the impact that will have on your taxes, you might intentionally try to take some losses in your brokerage account to offset that higher IRS bill.

It's always a good idea to think things through before selling off brokerage account investments. So whether you're looking at a gain or a loss, do your best not to act impulsively so you don't regret your decision.

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