Why You May Want to Sell Some Stocks at a Profit This Month

It's a strategy that could make sense under the right circumstances. 

It's more than fair to say that 2022 has been a tough year for stock market investors. Whether you have money in an IRA account, brokerage account, or both, there's a good chance your balance is lower right now than it was at the start of the year. In fact, your portfolio might be down year to date even with you having made contributions throughout 2022. 

Normally, a good strategy for investing in stocks is to purchase shares of quality businesses and hold them for many years. But if you have some stocks in your portfolio that are up, you may want to sell them at a profit this month if the circumstances call for it.

Why December could be a good time to sell stocks

When you buy or sell stocks in a regular brokerage account, it has the potential to impact your tax bill for the year. When you sell stocks at a price that's lower than what you paid for them, you're looking at capital losses. Those can be used to lower your taxes.

On the other hand, when you sell stocks at a price that's higher than what you paid for them initially, you face capital gains taxes. Those can increase your tax liability.

It's for this reason that investors have to be careful when selling stocks at a profit. But you may want to sell stocks at a profit this month if these two things apply to you:

• You have losses in your brokerage account to offset your gains.
• You have the potential to profit on a stock right now whose future is iffy.

The first item may be fairly easy to check off given the state of the stock market. It's the second one you'll need to think about.

You don't want to take any old stock in your portfolio that's up right now and sell it, because if you do, you might lose out on future profits. For example, say you bought shares of a given stock for $100 apiece and they're now trading for $125. That means you can enjoy a $25 profit per share. But if you hold those shares for another 10 years, they might be worth $250.

That's why if you're going to sell stocks at a profit this month, you should limit yourself to those you have reason to believe may have peaked and/or are likely to lose value going forward. So let's say shares you bought for $100 are now worth $125 but are likely to drop back down toward the $100 mark in 2023 and continue to fall. In that case, selling now could make sense, because chances are, you have losses in your brokerage account you can use to offset your gain. 

It's all about being strategic

Your goal as an investor is to make money. But sometimes, taking the money and running could mean owing the IRS a bundle of cash. If you're looking at a short-term opportunity to profit on the sale of a stock, then now's a good time to dump an underperforming stock and use that loss to offset your gain.