Editor’s Note: October is typically the worst month for investors, and stocks that are already down often see further declines. This is partly because many mutual funds, with fiscal years ending in October, unload underperformers to clean up their portfolios.

However, November historically brings a brighter outlook. As the best-performing month on record, November provides an opportunity to sell off weaker stocks that may temporarily bounce, enabling you to engage in some tax-loss harvesting for the year’s end.

Though year-end tax planning can be done through December, it’s wise for investors to begin planning early to have time to develop and execute a solid tax strategy. Below, I explain how to do it.

Taking Some Profits

This year’s big sector winners are utilities and real estate investment trusts (REITs). The only sector in negative territory year-to-date is the energy sector. Odds are, your overall portfolio is up, as the S&P 500 has gained more than 20% this year.

You may be thinking about taking some profits, but if you have gains outside of a retirement account, you will generate a tax liability.

A short-term capital gain occurs if you held an asset for less for one year before selling it. Short-term capital gains are subject to taxation as ordinary income.

For assets held longer than one year, you will benefit from a more attractive long-term capital gains tax rate. The long-term capital gains tax rates are 0%, 15%, or 20% depending on your taxable income.

Accordingly, one consideration as we head into the end of the year is how long you have held a security. By paying attention to the timing of your sale, you can save yourself quite a lot on your tax bill.

But you can save even more on your tax bill by offsetting those gains with any losses in your portfolio. This is the time of year that you should look over your portfolio and make those kinds of strategic decisions.

Tax-Loss Harvesting

As you scan your portfolio holdings, take a look at the most and least profitable holdings. If you have already sold some holdings for a profit, also take note of that.

Companies that are down for the year can face increased selling pressure as the year comes to a close. That’s why I prefer to do my tax-loss harvesting in November.

If you sell off your losers and harvest those losses, you can offset dollar-for-dollar your gains. This strategy is especially appealing to limit the impact of short-term capital gains.

You can even sell a losing company that you still like. Just be careful about the “wash sale” rule in the tax code. This rule prohibits a taxpayer from claiming a loss on the sale of a security and then buying a “substantially identical” security within 30 days of the sale.

What does “substantially identical” mean? It obviously covers selling and buying back common shares in the same company within 30 days. However, an S&P 500 index fund run by one company may be deemed by the IRS to be substantially identical to an S&P 500 index fund run by another company.

Swapping a Loser for a Winner

Let’s say you own shares of oilfield services provider Halliburton (NYSE: HAL), which was one of the worst-performing S&P 500 stocks this year with a decline of 22%.

You can sell those shares, record the loss to offset some of your gains, and then buy shares in competitor Schlumberger (NYSE: SLB), which is down 19% on the year.

When the oil services sector rebounds, your SLB shares should rise, but you got the tax benefit out of recording the loss.

I’d rather be feasting on gains than harvesting losses, but smart moves now can save you big time later. Just don’t wait until the last minute when all the other procrastinators are trying to do the same. Get ahead of the herd and your future self will thank you!

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