NOBODY LIKES TO SELL AN INVESTMENT AT A LOSS. However, using a strategy of realizing losses to reduce taxable gains, referred to as tax loss harvesting, can help you enhance the after-tax returns of your portfolios. Tax loss harvesting can not only save an investor taxes in the current year, but if done properly, can provide tax savings for years to come. Many investors avoid tax loss harvesting because they want to avoid selling something at a loss and possibly missing a rebound. We advise our clients to maintain their equity exposure even while tax loss harvesting. You can do this by simultaneously selling your asset that has an unrealized loss and purchasing a similarly correlated asset to the one just sold.
For example, if you have a large cap U.S. stock fund with a loss, sell
it and purchase another large cap U.S. stock fund with similar risk and holdings pro le. If you have an individual stock with a large loss, choose
a stock in the same industry or sector or comparable market (i.e. sell KO (Coca Cola) and buy PEP (Pepsi). If you feel you have to own the same security you are selling, you cannot buy it back for at least 31 days. Buying it back in 30 days or less will disallow your taxable loss under the IRS’s “wash sale” rules.
Losses can be used to offset any current year taxable gains. In addition, once you offset all of your gains, you can deduct an additional $3,000 in capital losses against your ordinary income. By deducting the
additional $3,000, an investor in the 39.6% bracket can save $1,188
in federal taxes. Of course, any realized losses in excess of $3,000 can
be carried forward inde nitely to future tax years to offset future capital gains. Therefore, an investor in the 39.6% bracket who had total unrealized losses of $50,000 in his or her portfolio can recover more than 1/3 of that loss by harvesting now and saving taxes in the future. We believe this is a good strategy and one that is often overlooked by investors.
Since individuals are on a calendar year for tax purposes, it is imperative that you review your portfolio with your investment advisor prior to the end of the year and if you have some unrealized losses in your portfolio, it may make sense to consider a tax loss harvesting strategy, especially if you already have taxable realized capital gains.
Tom Reynolds, CPA & Matt Reynolds CPA, CFP®
Co-Managing Partners, CRA Financial
Francis C. Thomas CPA, PFS, Investment Advisor Robert T. Martin, CFA, CFP®, Investment Advisor
This article is for informational and educational purposes only and should not be relied upon as the basis for an investment decision. Consult your nancial adviser, as well as your tax and/or legal advisers, regarding your personal circumstances before making investment decisions.