Buy-and-hold investors can use tax losses, too

— -- Q: How can selling losers benefit buy-and-hold investors at tax time? Isn't the point of buy-and-hold to not sell?

A: You're right. One of the beauties of being a buy-and-hold investor is that you don't have to worry about the best time to buy or sell.

By building a diversified basket of investments that matches your taste for risk, and holding on, you can make sure you're invested when the market moves higher. You can also guard against the danger of selling at market bottoms out of fear.

But, there are some nuances with the buy-and-hold strategy, created by taxes. If you itemize deductions, you are eligible to offset any capital gains with a capital loss. Beyond that — or if you don't have any capital gains — you can offset up to $3,000 of ordinary income each year until you've used up your capital loss. Capital losses are valuable because they reduce your taxable income.

To earn these capital losses, though, you must sell the investment you're losing money on and not buy it back for at least 30 days. As a long-term investor, it might feel wrong to sell a stock that's down, because you knew there would be some ups and downs. But by selling, you're enhancing your portfolio's after-tax returns by roughly your tax rate. Remember that sales commissions are part of your cost basis, too.

If you fear you might miss a market upturn while you're out of your stock, there are things you can do. Let's say you sell an individual stock for a loss. You can turn around and use the money to buy a Standard & Poor's 500 index fund at the same time. That way you won't miss out if the market recovers while you're waiting 31 days to buy your investment back.

Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Click here to see previous Ask Matt columns.