Tax Loss Harvesting - a year end strategy

One of the year end strategies we individually review for our clients with non-retirement accounts is Tax Loss Harvesting. It’s a simple but effective way to reduce tax bills and tidy portfolios before the year ends. Think of it as a little financial fall cleaning that can help you start the new year on stronger footing.

Here’s a quick breakdown:

Tax-loss harvesting lets you turn market losses into tax wins. When you sell investments that have dropped in value, you can offset gains from others you've sold at a profit. This helps shrink your tax bill and make the most of up an down market sectors.

Here’s a quick example: Suppose you made $5,000 from selling Stock A earlier this year. But Stock B is now worth $4,000 less than what you paid for it. If you sell Stock B before the year ends, you can use that $4,000 loss to reduce your taxable gain from Stock A, lowering it to just $1,000.

 When your losses are greater than your gains, you can knock up to $3,000 off your regular income this year and even carry any leftover losses into future years to keep saving.

 Benefits of Tax-Loss Harvesting  

1. Reduce Your Tax Bill - By using investment losses to cancel out gains, you may end up owing less in capital gains taxes and even reduce your regular income taxes.

2. Turn Setbacks Into Tax Savings - Losing money on an investment never feels good. Tax-loss harvesting lets you put those losses to work in a productive way.

3. Clear Out the Clutter - Think of this as a fall clean-up for your portfolio. Selling off underperforming investments can help you refocus on what's truly aligned with your goals.

Potential Pitfalls of Tax-Loss Harvesting 

1. The Wash Sale Rule Can Trip You Up - When you sell an investment at a loss but then buy the same (or a very similar) one within 30 days, you have a wash sale. When that happens, the IRS won't let you claim the loss.

2. It Doesn’t Always Provide a Big Win - If you don't have much in capital gains this year, or you're in a lower tax bracket, the tax benefit of harvesting losses might be minimal.

3. Emotional Investing Risks - Sometimes, it's hard to let go of an asset you believe will bounce back. Keep in mind that smart investing is about long-term planning, not short-term emotions.

Although you may not always be able to capitalize on this strategy, is it something that we like to review around this time of year.

All the best -

JL