by KYW's Salil Gutt

Personal finance articles are urging investors to dump their losers to harvest tax losses as savvy year-end tax planning. A good strategy but with one problem. Most people do not know what makes up a tax loss. This is particularly true when it comes to mutual fund investments. Many have tax losses way more than they think they have.  Let me explain.

Say you invested $1,000 in a mutual fund in the early 1990's.  The booming market resulted in your receiving dividends and outsized capital gain distributions every year, money that you paid income taxes on. Say you received a total of $500 in dividends and capital gain distributions over the years. Your tax cost in this investment is $1,500 not the $1,000 you invested. So if you dump your now cold fund and realize $750, your tax loss is $750 not the $250 that most investors think they have.

Computing this cost basis is a nightmare only an accountant could love. If harvesting tax losses makes sense to you, it may be well worth your time and money to consult your accountant as to the true extent of the tax losses you have.