Tax Loss Harvesting: Capitalize on Your Investment Losses

Daniel Penzing
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Benefits of Tax Loss Harvesting

When you sell your stocks, you will typically owe capital gains tax when you make a profit. But in some cases, you may make a loss. If you still hold the stock, you do not want to sell it to trigger this loss. But you don’t want to lose your loss, either.

Tax loss harvesting is a technique that allows you to claim the loss so you can restructure your portfolio. You can sell other positions to offset the capital gain you will have from selling the stock that created the loss.

How Tax Loss Harvesting Works

Tax loss harvesting is the process by which you use investment losses to minimize your tax liability. Today, there are a variety of strategies that you can use for tax loss harvesting. However, most strategies involve some form of selling a loser stock at a loss and then buying a similar stock to diversify your portfolio.

By selling one of your losers, you avoid capital gains (which are at a higher rate than ordinary income) – so you’re essentially getting to keep more of your stock for a lower price. Even if the stocks don’t all go up, in the long run, you end up making money.

So how can you make this happen? For starters, you need to find a brokerage that allows you to take advantage of tax loss harvesting. You can do this by searching the site.

The structure of the fund can also impact whether you are able to tax loss harvest. Some funds, for example, have a strategy that involves selling stock when the investor needs the money. When these funds have losses throughout the year, the investor is able to use these losses to minimize his taxes.

Is Tax Loss Harvesting Worth It?

Tax loss harvesting is used in the investment business. It’s the practice of selling investment assets at a loss in order to utilize the lost capital to offset gains in other positions in your portfolio. By doing this you can reduce the gain/loss when you sell a security. It is meant to manage taxes as some areas of your portfolio may have gains that other parts of your portfolio has losses.

It’s important to note that the steps for properly tax loss harvesting a position is a multi-day process in order to maximise your benefits. This is something that takes time, patience, and practice.

Whether or not you use a tax loss harvesting service will depend on how you choose to invest. If you are investing using a financial advisor or hands off option, using an advisor that has access to a tax loss harvesting service may be the prudent thing to do. Depending on the size of the operation, most large-scale financial institutions have some sort of tax loss harvesting service. While many of these firms have their own in house platform, many use a more universal platform like Tax Act or Amadeus. In recent years there have been some mainstream firms who have started to offer tax loss harvesting services as well.

The Wash Sale Rule

When you purchase stocks for your investment portfolio, there are often times circumstances when you are forced to realize a loss on your investments.

Major reasons that might cause you to realize a loss includes:

When you realize a loss on your investment, you are allowed to deduct the loss from your other capital gains if you –in effect— replace the same stock right away. You may also be required by the wash sale rule to realize the loss to the extent of your “basis” in the property.

To prevent you from harvesting losses on investments and using the losses repeatedly in a tax shelter, the Internal Revenue Code has instituted the wash sale rule.

According to the rule, “Wash sales” occur when you sell or trade stock at a loss, both you and your spouse sell or trade the same (or substantially identical) stock within 30 days before or after the date of sale.

Query: What does “substantially identical” mean?

Answer: According to the IRS, strictly speaking, the identical stock or a stock that is so close to the original as to be nearly identical should be treated as a replacement to prevent wash sale shelters.

When Not to Harvest Losses

There is no black and white answer for this question. Often, it depends on your tax situation and goals.

If you are in a low tax bracket, you may decide that you don’t want to harvest losses if that means you’ll have a higher overall tax bill in retirement. You could look at harvesting losses in the current year, but recognizing that you’re paying more in taxes now than you otherwise would have.

Overall, you’re better off financially to harvest your losses if you expect to be paying significantly more taxes in the future.

Tax Gain Harvesting

Gain harvesting is a method of tax loss harvesting.

Tax Loss Harvesting is simply the process of realizing losses on a position to either offset gains in other asset classes or delay taxes.

Losses harvesting is the process of selling a security at a lower than the original cost in order to realize a loss that can offset gains from other securities.

Harvesting allows us to realize losses that normally would not have occurred. This can have a significant positive impact on your portfolio.

Tax Gain Harvesting is the practice of selling winning positions in your portfolio to offset taxes on any losers.

Which Robo Advisors Offer Tax Loss Harvesting?

Lots of robo advisors are now offering tax loss harvesting as a feature of their investment management services … and it’s something that more and more advisors are starting to offer. It allows those with taxable portfolios to harvest capital losses from their taxable accounts and offset gains in their tax deferred accounts, like an IRA or 401(k).

The aim is to realize capital gains in one place, and offset gains in another.

What is Tax Loss Harvesting?

Tax loss harvesting isn’t an investment strategy in and of itself. Rather, it’s a mechanism for selling investments to realize capital losses with the intention of offsetting gains … essentially, it’s taking a loss for tax purposes while selling. It’s used to offset gains in other places – primarily, capital gains in other accounts.