Tax Loss Harvesting

Tax Form Documents

One benefit of your investments depreciating in value

What is it?

Tax loss harvesting is the strategy of selling investments that are at a loss in order to offset short term or long term capital gains for that year.  However, if the investor does not have realized capital gains for that year the investment loss can be used to offset $3,000 worth of ordinary income for the year.  One thing to keep in mind is that if the investment loss was more than $3,000 the excess amount may be carried forward to future years to offset either ordinary income or capital gains.  This amount only applies to taxable accounts. The gains and losses in retirement accounts are tax deferred and do not apply to this same tax treatment.


Wash Sale Rule

In order to prevent investors from gaming the system the IRS put in the wash sale rule. This rule was created in order to prevent investors from taking a tax deduction and then turning around and repurchasing the same or a “substantially identical” security.  The wash sale rule consists of 61 total days. This is broken down by 30 days before the purchase and 30 days after the sale that an investor cannot purchase a substantially identical security.


When to consider tax loss harvesting

Most investors will take a look at selling some securities at a loss towards the end of the year while they are doing some year end tax planning. However, this strategy can be implied all throughout the year.  A time to consider tax loss harvesting would be during the normal course of rebalancing your investments. This is good because you can capture some tax savings and then invest in a security that may be in a similar asset category to maintain your same overall asset allocation.

Another consideration is if an investor has held stock in a single company over the course of many years.  More often then not the investor may be reinvesting the dividends from this company stock. The first step would be to identify shares that were purchased through reinvestment that may currently be trading at a loss and look to sell those shares. This can help to offset taxes on the qualified dividends or the future sale of the stock to produce income in retirement.

Identifying certain positions in your portfolio now can be a good time to harvest losses if you believe the market may rebound in the future to higher levels.  The strategy could be to sell certain investments to lock in the tax deduction, and look to purchase other securities that are not substantially identical with the expectation of those investments appreciating in the future.  Now is a great time to examine what future income you may need from your investment portfolio and if you see securities that are at a loss right now, it could be a good time to sell those in order to offset future capital gains later this year.



Link to Disclaimer