Tax-Loss HarvestingJuly 28, 2020
By Jeremy Reif, CRPS®, Financial Advisor and Owner of Point Wealth Management
A useful year-end move to counteract capital gains.
Even though this may end up being a subpar year for stocks, you may realize capital gains, which is a taxable event. What can you do about them? You can do what some investors do – you could recognize investments with a loss and practice “tax-loss harvesting.”
Keep in mind this article is for informational purposes only. It’s not a replacement for real-life advice, so make sure to consult your tax legal and accounting professional before modifying your investment strategy.
Selling losers to offset winners
Tax-loss harvesting means taking capital losses (you sell securities worth less than what you first paid for them) to help offset the capital gains you may have recognized. Keep in mind that the return and principal value of securities will fluctuate as market conditions change and past performance is no guarantee of future returns.1
While this doesn’t get rid of your losses, it can be an approach to manage your tax liability.
The tax-saving potential
Sure, you can use this technique to put your net gains at $0, but that’s just a start. Up to $3,000 of capital losses in excess of capital gains can be deducted annually, and any remaining capital losses above that can be carried forward to, potentially, offset capital gains next year.But remember, tax rules are constantly changing, and there is no guarantee that the treatment of capital gains and losses will remain the same.1
So, by taking losses this year and carrying over the excess losses into the next, you can potentially offset some (or maybe all) of your capital gains next year.
The strategy in action
It is really quite simple. Step A is to pick out the losers in your portfolio. Step B is deciding which losers to sell. Step C is giving the green light to those transactions. Your portfolio may reflect your time horizon, risk tolerance, and investing goals. So, before moving ahead with a trade, it’s important to understand the role each investment plays in your portfolio.1
You must watch out for the I.R.S.’s “wash-sale rule,” however. You can’t claim a loss on a security if you buy the same or a “substantially identical” security within 30 days before or after the sale. In other words, you can’t just sell a security to rack up a capital loss and then quickly replace it. Your investment professional can illustrate how a “wash sale” works.1
Watch the fine print on wash sales
The wash-sale rule applies to your entire taxable portfolio, not just one taxable account within it. So, as an example, if you sell individual holdings of stock in a company, you still must wait for the wash-sale window to close before you can purchase shares of that same firm. Also, the wash-sale rule applies to multiple taxable accounts – worth remembering if you and your spouse file your taxes jointly.1
The (minor) drawbacks
It’s important to stress that you may not wish to alter a carefully chosen portfolio simply for tax-loss harvesting, especially if it has been built for the long term.
You can only practice tax-loss harvesting in taxable accounts; tax-advantaged accounts are ineligible for this strategy. Transaction costs can add up, so think about those potential costs versus the overall strategy before you begin.1
Not just a year-end tactic, but also a year-round strategy
Some investors harvest losses throughout the year, not just in December. You may want to ask the financial professional you know and trust how you can harvest losses.No strings attached, I am here to help you and point you in the right direction. Would you like help finding out what path your current plan is on? Give me a call.
Have questions? Schedule a call and meet me virtually
ABOUT JEREMY REIF, CRPS®
Jeremy Reif is an independent financial advisor with more than a decade of experience in the financial services industry. He is also the owner of Point Wealth, LLC, an independent financial planning and investment management firm. With advanced credentials and training in retirement planning and financial planning, Jeremy specializes in helping individuals and families pursue financial independence. Regardless of the services he’s providing, he focuses on talking openly about financial planning, the industry, common questions about retirement planning, and more to help everyday investors gain more confidence in their financial opportunities. Based in Wausau, Wisconsin, Jeremy serves clients throughout the state and can work virtually with clients throughout the country. To learn more, visit http://pointwealthmanagement.com and connect with Jeremy on LinkedIn.
Investment Advisory Services offered through Retirement Wealth Advisors, (RWA) a Registered Investment Advisor. Point Wealth Management, RWA, WEG are not affiliated. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Securities offered through World Equity Group, Inc. member FINRA and SIPC. World Equity Group, Inc. and Point Wealth Management do not provide tax advice. For tax advice consult with a qualified tax professional.
1 – Investopedia.com, February 26, 2019