Tax-loss harvesting is a strategy used to reduce the amount of taxes owed. There are multiple ways to implement tax-loss harvesting, some of which may be more beneficial than others depending on circumstances.

Mitigating taxes is a major goal of many investors. About two-thirds of people consider their federal income tax to be too high.

As you may know, tax-loss harvesting involves intentionally incurring losses in a taxable investment account by selling one or more that have fallen in value to below the price you initially paid for them. By realizing that capital loss, you may offset capital gains that have been generated by other securities in the portfolio — for example, appreciated assets that you’ve sold at a profit or capital gains distributions made by a mutual fund.

Ideally, your harvested losses would cancel out any gains on which you’d be taxed. Additionally, the rules enable you to use those losses beyond the immediate gains. Say that your realized capital losses are greater than the capital gains in your portfolio this year. In that case, you can use as much as $3,000 of those losses to offset ordinary taxable income for the year.

As an added bonus, if your realized losses exceed both the capital gains and the $3,000 income limit for the current year, you can carry those losses forward.

Being smart with TLH

As with any investment strategy, tax-loss harvesting should be used in ways that reflect each investor’s situation in order to generate the optimal benefits. Consider some key issues and risks to think through before seeking to harvest investment losses, including:

1. Missing out on rapid gains. Investors often want to do a lot of tax-loss harvesting after a particular market sector, or even the market as a whole, has been nosediving. During corrections and bear markets, it’s easy to believe more negative results are ahead and to therefore book losses. Ditching investments to sidestep taxes can cause you to miss out on upside if those investments surge.

2. Replacing the assets you sell. After you sell an investment at a loss in hopes of offsetting taxable gains, your next move is an important one. If you want to continue to have exposure to the type of asset you just sold, the obvious move would be to buy a similar investment. Example: replacing an S&P 500 ETF with another ETF that tracks that same index.

But here’s where you come face-to-face with what’s called the wash sale rule, which says that if you sell a security at a loss and buy the same or a similar security within 30 days before or after the sale, you can’t claim the loss on your tax return.

The good news: You may be able to replace the sold security with one that is different enough to satisfy the IRS.

Only part of the equation

Tax-loss harvesting should be just one possible move to consider when looking to mitigate taxes. Other strategies include converting a traditional IRA or 401(k) to a Roth IRA, taking advantage of tax-exempt investments, and implementing a charitable giving strategy with tax benefits.

Jim Valis & Gregg Manis
Blackstone Valley Wealth Management
22 South Street Suite 202
Hopkinton, MA 01748
508-435-1281
blackstonevalleywealth.com

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Private Advisor Group, a registered investment advisor. Private Advisor Group and Blackstone Valley Wealth Management, LLC. are separate entities from LPL Financial.

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